Qayyum, Abdul and Bilquees, Faiz (2005): P-Star Model: A Leading Indicator of Inflation for Pakistan. Published in: The Pakistan Development Review , Vol. 44, No. 2 (2005): pp. 117-129.
Download (252Kb) | Preview
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.
|Item Type:||MPRA Paper|
|Institution:||Pakistan Institute of Development Economics|
|Original Title:||P-Star Model: A Leading Indicator of Inflation for Pakistan|
|Keywords:||Inflation; P-star model; Forecasting: Pakistan|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation|
|Depositing User:||Abdul Qayyum|
|Date Deposited:||08. Mar 2007|
|Last Modified:||17. Feb 2013 20:32|
Bomhoff, E. J. (1990) Stability of Velocity in the Group of Seven Countries: A Kalman Filter Approach. (September). (IMF Working Paper (WP/90/80).) Braun, S. (1990) Estimation of Current Quarter Gross National Product Pooling Preliminary Labour Market Data. Journal of Business and Economic Statistics 8, (July), 293–304. Christiano, L. J. (1981) A Survey of Measures of Capacity Utilisation. IMF Staff Papers (March), 144–198. Christiano, L. J. (1989) P*: Not the Inflation Forecaster’s Holy Grail. Federal Reserve Bank of Minneapolis, Quarterly Review 13, 3–18. Clements, Michael P., and D. F. Hendry (1998) Forecasting Non-stationary Economic Time Series. MIT Press. Ebrill, L. P., and S. M. Fries (1990) The Dynamics of Money Demand and Prices. (August). (IMF Working Paper 90/75.) Engle, R. F., and C. W. J. Granger (1987) Cointegration and Error Correction: Representation, Estimation, and Testing. Econometrica 50, 251–76. Federal Bureau of Statistics (Various Issues) Statistical Year Book. Federal Bureau of Statistics. Fisher, D., and A. Fleissig (1995) Monetary Aggregates and the P* Model of Inflation in the United States. Department of Economics, North Carolina State University. (Working Paper.) Gibbs, D. (1995) Potential Output: Concepts and Measurement. Labour Market Bulletin 1, 72–115. Hallman, J. J., R. D. Porter, and D. H. Small (1989) M2 Per Unit of Potential GNP as an Anchor for the Price Level. Board of Governors of the Federal Reserve System (April). (Staff Study No. 157.) Hallman, J. J., R. D. Porter, and D. H. Small (1991) Is the Price Level Tied to the Stock of M2 in the Long-run. American Economic Review 81, 841–858. Hannah, S., and A. James (1989) P-star as a Monetary Indicator for the UK. NatWest Capital Markets (June). Hodrick, R. J., and E. C. Prescott (1980) Post-war US Business Cycles: An Empirical Investigation. Evanston, Illinois: Centre for Mathematical Studies in Economics and Management Science, Northwestern University. (Discussion Paper No. 451.) Hoeller, P., and P. Poret (1991) Is P-Star a Good Indicator of Inflationary Pressure in OECD Countries. OECD Economic Studies 17. International Monetary Fund (2004) International Financial Statistics. IMF. Kool, C., and J. Tatom (1994) The P-Star Model in Five Economies. Federal Reserve Bank of St. Louis Review 3. Kuttner, K. (1992) Monetary Policy with Uncertain Estimates of Potential Output, Economic Perspective. Federal Reserve Bank Chicago 16:1. McMarrow, K., and W. Poeger (2001) Potential Output: Measurement Methods, New Economy Influences and Scenarios for 2001–2010—A Comparison of the EU15 and the US. (European Commission Economic Papers No. 150.) Okun, A. M. (1962) Potential GDP: Its Measurement and Significance. Proceedings of the Business and Economic Statistics Section, American Statistical Association 98–104. Orphanides, A., and R. D. Porter (2000) P* Revisited: Money-Based Inflation Forecasts with a Changing Equilibrium Velocity. Journal of Economics and Business 52, 87–100. Pecchenino, R. A., and R. H. Rasche (1990) P* Type Models: Evaluation and Forecasts. (August). (NBER Working Papers Series No. 3406.) Stock, J. H., and M. W. Watson (2001) Forecasting Output and Inflation: The Role of Asset Prices. (NBER Working Paper No. 8180.) Stock, James H., and Mark W. Watson (1999) Forecasting Inflation. Journal of Monetary Economics 44, 293–335.