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P-Star Model: A Leading Indicator of Inflation for Pakistan

Author

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  • Qayyum, Abdul
  • Bilquees, Faiz

Abstract

The P-star inflation model is based on the long-term quantity theory of money and puts together the long-term determinants of the price level and the short-run changes in current inflation. The P-star model-based indicator has replaced the previous monetary policy procedures in a number of countries because it offers by far more information and predictive power than monitoring movements in money supply and the rate of monetary growth. In this paper we used the P-star model to calculate the leading indicator of inflation, and also to test the forecasting performance of the P-star model-based leading indicator of inflation. The results of the study show that compared to the simple autoregressive model and the M2 growth augmented model, the P-star model can be used to obtain the leading indicator of inflation in Pakistan because it has additional information about the future rate of inflation. Therefore, this paper provides a useful tool to the policy-makers to assess the future movement of inflation in Pakistan.

Suggested Citation

  • Qayyum, Abdul & Bilquees, Faiz, 2005. "P-Star Model: A Leading Indicator of Inflation for Pakistan," MPRA Paper 2058, University Library of Munich, Germany, revised 2005.
  • Handle: RePEc:pra:mprapa:2058
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    File URL: https://mpra.ub.uni-muenchen.de/2058/1/MPRA_paper_2058.pdf
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    References listed on IDEAS

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    1. Orphanides, Athanasios & Porter, Richard D., 2000. "P revisited: money-based inflation forecasts with a changing equilibrium velocity," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 87-100.
    2. Eduard J Bomhoff, 1990. "Stability of Velocity in the Group of Seven Countries; A Kalman Filter Approach," IMF Working Papers 90/80, International Monetary Fund.
    3. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, number 9780521632423.
    4. Clemens J. M. Kool & John A. Tatom, 1994. "The P-star model in five small economies," Review, Federal Reserve Bank of St. Louis, issue May, pages 11-29.
    5. Lawrence J. Christiano, 1989. "P*: not the inflation forecaster's holy grail," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-18.
    6. Kenneth N. Kuttner, 1992. "Monetary policy with uncertain estimates of potential output," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 2-15.
    7. Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262531895, January.
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    Cited by:

    1. S. Adnan & H.A.S. BUKHARI & Safdar Ullah KHAN, 2008. "Does Volatility In Government Borrowing Leads To Higher Inflation? Evidence From Pakistan," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(3(5)_Fall), pages 187-202.
    2. Mehak Moazam & M. Ali Kemal, 2016. "Inflation in Pakistan: Money or Oil Prices," PIDE-Working Papers 2016:144, Pakistan Institute of Development Economics.
    3. Abdul Qayyum, 2006. "Money, Inflation, and Growth in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(2), pages 203-212.
    4. Mehak Moazam & M. Ali Kemal, 2016. "Inflation in Pakistan: Money or Oil Prices," Working Papers id:11507, eSocialSciences.

    More about this item

    Keywords

    Inflation; P-star model; Forecasting: Pakistan;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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