Abstract
Two versions of the P-star model (P*) of inflation are tested for Belgium, France, Germany and the Netherlands for the period 1973.I–1992.IV. In the first, conventional version the statistical links between national monetary aggregates and domestic inflation are examined. Conversely, the chosen set up in the second version allows for symmetric monetary spill-over effects between these countries. The estimates suggest that inflation in Belgium and the Netherlands is nowadays fully determined by the European price gap and not by domestic monetary conditions, while the relative importance of the European price gap is increasing in the case of France and Germany. All in all the European price gap provides an accurate indicator for future inflationary tendencies in all four countries. Moreover, we find that the European inflation equation is stable over the sample period. Taken together these results suggest that (implicit) targeting of a European monetary aggregate in addition to explicitly targeting the German money supply may become necessary to achieve and maintain price stability in Europe in the near future.
The views expressed in this paper are personal and do not necessarily reflect those of the Nederlandsche Bank.
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Groeneveld, H., Koedijk, K., Kool, C. (1996). Monetary Interdependencies in the “Core” ERM Countries: The P-Star Approach. In: Alders, J.A.J.K., Koedijk, K.G.K., Kool, C.J.M.C., Winder, C.C.M.C. (eds) Monetary Policy in a Converging Europe. Financial and Monetary Policy Studies, vol 31. Springer, Boston, MA. https://doi.org/10.1007/978-1-4613-1249-9_3
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DOI: https://doi.org/10.1007/978-1-4613-1249-9_3
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