Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 671: Does the P* Model provide Any Rationale for Monetary Targeting?

Lars Svensson ()
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Lars Svensson: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden

Abstract: The so called P* model is frequently used or referred to in discussions of monetary targeting. This gives the impression that the P* model might provide some rationale for monetary targeting or for the monetary reference value used by the Eurosystem. The P* model implies that inflation is detremined by the level of and changes in the "real money gap" (the deviation of current real balances from their long-run equilibrium level), and hence that the money gap is an important indicator for future inflation. Nevertheless, the P* model does not seem to provide any rationale for either a Bundesbank-style money-growth target or a Eurosystem-style money-growth indicator.

Keywords: Real Balances; Reference value; Inflaion targeting

JEL-codes: E42; E52; E58

21 pages, June 3, 1999

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