Kiel Working Papers, Kiel Institute for World Economics
No 1019:
Predicting Inflation in Euroland ; The Pstar Approach
Joachim Scheide and Mathias Trabandt
Abstract: Inflation is a monetary phenomenon. While this statement
is widely accepted in terms of a long-run relationship, the quantity theory
has been made operational also for the short-run dynamics of inflation by
so-called Pstar models. An error correction model with quarterly data for
the Euro Area is estimated to test whether the price gap has an impact on
consumer price inflation. The response of the HICP is strongly positive.
Other factors such as raw material prices and unit labor costs also have
some explanatory power. The model is used for shock analysis and
out-of-sample forecasts. All in all, the Pstar model can be a useful tool
for predicting inflation also in Euroland.
Keywords: Inflation process, forecasting, error correction models; (follow links to similar papers)
JEL-Codes: C22; C53; E31; (follow links to similar papers)
22 pages, December 2000
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