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The usefulness of P* measures for Japan and Germany

  • Linda S. Kole
  • Michael P. Leahy
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    This paper develops measures of long-run equilibrium price levels (P*) for Japan and Germany following the approach used for the United States by Hallman, Porter, and Small [1991]. Under this approach, P* is detemined by potential output, equilibrium velocity, and the amount of money in the economy. Constructing P* for these foreign countries is more complicated than in the U.S. case because the velocities of the broad monetary aggregates (M2+CDs in Japan and M3 in Germany) exhibit clear downward trends in contrast to the relatively flat trend of U.S. M2 velocity. We utilize dynamic specifications of money demand to construct measures of equilibrium velocity and P for Japan and Germany. We then assess the explanatory power of deviations of actual prices from P* in predicting the amount of inflationary potential in the Japanese and German economies. In general, we find that the P* approach is useful in the analysis of German inflation, but that it is less promising for Japan than it has been for the United States.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/1991/414/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1991/414/ifdp414.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 414.

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    Date of creation: 1991
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    Handle: RePEc:fip:fedgif:414
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    1. Jeffrey J. Hallman & Richard D. Porter & David H. Small, 1989. "M2 per unit of potential GNP as an anchor for the price level," Staff Studies 157, Board of Governors of the Federal Reserve System (U.S.).
    2. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-58, September.
    3. Kazuo Ueda, 1990. "Financial deregulation and the demand for money in Japan," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 176-205.
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