IDEAS home Printed from https://ideas.repec.org/p/trb/wpaper/2000.07.html
   My bibliography  Save this paper

The P-Star Model in Australia and New Zealand

Author

Listed:
  • Ramya Hewarathna

    () (School of Economics, La Trobe University)

Abstract

This paper studies the usefulness of the P-star model in the analysis of the behaviour of prices in Australia and New Zealand. The P-star model is based on the quantity theory of money and the belief that the price level tends to move towards the equilibrium price level. The main contribution of this model is the use of the price gap - the difference between current price and the equilibrium price (P-star) - to forecast inflation. Hence, if the equilibrium price is greater than the current price, there is a tendency for the price level to rise. The equilibrium price in this approach is determined by potential output, the equilibrium velocity of money and the amount of money in the economy. In this study, potential output and equilibrium velocity, which are necessary variables in the construction of the equilibrium price level (P-star), are derived using the Hodrick and Prescott filter. The information contained in the price gap about Australian and New Zealand inflation is examined using an error correction model. In contrast to findings for the USA, the evidence does not strongly support the P-star model for Australian prices. However, results support the P-star model for the New Zealand case. Furthermore, according to the proponents of the P- star model the lagged value of the price gap must be significant in the model of inflation. But results of this study suggest that the contemporary value of the price gap is significant and it is difficult to provide a theoretical interpretation for this finding.

Suggested Citation

  • Ramya Hewarathna, 2000. "The P-Star Model in Australia and New Zealand," Working Papers 2000.07, School of Economics, La Trobe University.
  • Handle: RePEc:trb:wpaper:2000.07
    as

    Download full text from publisher

    File URL: http://www.latrobe.edu.au/__data/assets/pdf_file/0020/130862/2000.07.pdf
    File Function: First version, 2000.07.pdf
    Download Restriction: no

    More about this item

    Keywords

    BEHAVIOUR ; MODELS ; PRICES;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:trb:wpaper:2000.07. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stephen Scoglio). General contact details of provider: http://edirc.repec.org/data/sblatau.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.