Discussion paper

DP2198 Does the P* Model Provide Any Rationale for Monetary Targeting?

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 determined 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 real 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.

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Citation

Svensson, L (1999), ‘DP2198 Does the P* Model Provide Any Rationale for Monetary Targeting?‘, CEPR Discussion Paper No. 2198. CEPR Press, Paris & London. https://cepr.org/publications/dp2198