Money and Inflation: Evidence from P-Star Model

Sunil Paul, Sartaj Rasool Rather () and M Ramachandran ()

Working Papers from Madras School of Economics,Chennai,India

Abstract: This study uses P-star model to examine the role of money in explaining inflation in India. In particular, we compare the performance of traditional Phillips curve approach against P-star model in forecasting inflation. Moreover, the study estimates P-star model using the alternative measures of money such as simple sum and Divisia M3, to examine the relevance of aggregation theoretic monetary aggregates in explaining inflation. The empirical results indicate that P-star model with real money gap has an edge over traditional Phillips curve approach in forecasting inflation. More importantly, we found that the P-star model estimated with Divisia real money gap performs better than its simple sum counterpart. These results highlight the role of money in explaining inflation in India.Length: 39 pages

Keywords: Inflation; P-star; Philips curve; Divisia monetary aggregates (search for similar items in EconPapers)
JEL-codes: C43 E49 (search for similar items in EconPapers)
Date: 2015-08
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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