The Domestic and Foreign Price Gaps in the P-STAR Model: Evidence from Spain

Alicia García-Herrero and Manoj Pradhan
Authors registered in the RePEc Author Service: Alicia Garcia Herrero

No 1998/064, IMF Working Papers from International Monetary Fund

Abstract: 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.

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 (search for similar items in EconPapers)
Pages: 26
Date: 1999-10-01
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Citations: View citations in EconPapers (6)

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