The P-star Model in Iran (1960-2005)

Abstract

This paper studies the usefulness of the P-model in the analysis of the behaviour of prices in Iranian economy. The P-model is based on the Quantity of Theory of Money. This model believes that the price level tends to move towards the equilibrium price level. The model uses price gap to forecast inflation, if the equilibrium price is greater than the current price, there is a tendency for the price level to rise and vice versa. The equilibrium price in this approach is determined by potential output, the equilibrium velocity of money and the amount of money in the economy. In this study, potential output and equilibrium velocity are derived using the Hodrick and Prescott filter.