P-Star Model: A Leading Indicator of Inflation for Pakistan

Pakistan Development Review, Vol. 44, No. 2, pp. 117-129, 2005

13 Pages Posted: 9 Feb 2007

See all articles by Abdul Qayyum

Abdul Qayyum

Faiz Bilquees

Pakistan Institute of Development Economics

Abstract

The P-star inflation model is based on the long-term quantity theory of money and puts together the long term determinants of the price level and the short run changes in current inflation. The P-star model based indicator has replaced the previous monetary policy procedures in a number of countries because it offers by far more information and predictive power than monitoring movements in money supply and the rate of monetary growth. In this paper we used the P-star model to calculate the leading indicator of inflation and also test the forecasting performance of P-star model based leading indicator of inflation. The results of the study show that compared to the simple autoregressive model and M2 growth augmented model, the P-star model can be used to obtain the leading indicator of inflation in Pakistan because it has additional information about the future rate of inflation. Therefore this paper provides a useful tool to the policy makers to assess the future movement of inflation in Pakistan.

Keywords: p-star, inflation, forecasting, leading indicator

Suggested Citation

Qayyum, Abdul and Bilquees, Faiz, P-Star Model: A Leading Indicator of Inflation for Pakistan. Pakistan Development Review, Vol. 44, No. 2, pp. 117-129, 2005. Available at SSRN: https://ssrn.com/abstract=962323

Faiz Bilquees

Pakistan Institute of Development Economics

Quaid-i-Azam University Campus, P.O. Box. 1091
Islamabad, Capital 44000
Pakistan

No contact information is available for Abdul Qayyum

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