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Working Paper 1992-001A

"The P-Star Model and Austrian Prices"
by John A. Tatom

In the P-star model the price level is determined by the money stock per unit of potential output and the long-run equilibrium level of the velocity of money. This article applies this model to Austria. Problems in identifying permanent shocks to potential output and/or velocity lead to the rejection of such models of the price level, but their first-difference version is not so suspect. While evidence is found of a long-run relationship between Austria inflation and money growth, even the first-difference version of the P-star model is rejected for Austria. Since Austria is a small economy, closely tied to Germany, the article also investigates whether Austrian prices are tied to a German P-star measure. This hypothesis is also rejected, but there is a statistically significant long-run relationship between Austrian and German inflation. Moreover, Austrian money growth remains significant even in this relationship.

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Category > International
Category > Monetary Policy/Macroeconomics
Research Papers and Publications: JEL Code > E31
Research Papers and Publications: JEL Code > F41
Research Papers and Publications: JEL Code > E52
Research Papers and Publications: JEL Code > F42