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Working Paper 1990-008A

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"The P-Star Approach to the Link Between Money and Prices"
by John A. Tatom

This paper examines several specification errors in the M2-based P* model and develops an M1-based estimate of this model. The apparent statistical significance of M2 is shown to arise from a spurious regression that uses a non-stationary regressor and because the significance test for M2 is biased by including the influence of a lagged dependent variable whose coefficient is not normally distributed. When these problems are addressed, M2 is not statistically significant related to the price level. The M1-based P* model exhibits a significant relationship between M1 and the price level, however.

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Category > Monetary Policy/Macroeconomics