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The Domestic and Foreign Price Gaps in the P-STAR Model: Evidence from Spain
Author: Ms. Alicia García-Herrero and Manoj Vasant Pradhan
Series:
IMF Working Papers
Volume/Issue:
Volume 1998: Issue 064
Language:
English
Publication Date:
01 Oct 1999
DOI:
https://doi.org/10.5089/9781451848533.001
ISBN:
9781451848533
ISSN:
1018-5941
Pages:
26
Keywords:
WP; price gap; gap; equilibrium price; velocity gap; gap effect; Gap terms; gap decrease; gap times; gap variable; Inflation; Exchange rates; Output gap; Potential output; Conventional peg; Europe
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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The paper uses the P-STAR model to analyze Spanish prices from 1970 to 1996, adding the foreign price gap to the standard domestic definition of the P-STAR model (the domestic price gap) to assess the role German price movements played in Spanish inflation. The domestic price gap turns out to be the major explanatory variable for inflation, even after the entrance of Spain in the exchange rate mechanism (ERM). This result suggests that the successful disinflation experienced in Spain in the past few years may be more related to domestic conditions than to foreign ones.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund