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

Lars E.O. Svensson

NBER Working Paper No. 7178 (Also Reprint No. r2273)
Issued in June 2000
NBER Program(s):   ME

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 '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.

(201 K)

Published: German Economic Review, Vol. 1, no. 1 (February 2000): 69-81.

This paper is available as PDF (201 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX