Working Paper

The P-star model and Austrian prices

Abstract: In the P-star model the price level is determined by the money stock per unit of potential output and the long-run equilibrium level of the velocity of money. This article applies this model to Austria. Problems in identifying permanent shocks to potential output and/or velocity lead to the rejection of such models of the price level, but their first-difference version is not so suspect. While evidence is found of a long-run relationship between Austria inflation and money growth, even the first-difference version of the P-star model is rejected for Austria. Since Austria is a small economy, closely tied to Germany, the article also investigates whether Austrian prices are tied to a German P-star measure. This hypothesis is also rejected, but there is a statistically significant long-run relationship between Austrian and German inflation. Moreover, Austrian money growth remains significant even in this relationship.

Keywords: Money; Prices; Austria;

Status: Published in Empirica, v. 19, no. 1 (March 1992) pp 3-17

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 1992

Number: 1992-001