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

IMF Working Papers, October 1, 1999

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

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Bibliographic details

• Authors: Alicia García-Herrero, Manoj Vasant Pradhan
• Published: October 1, 1999
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451848533.001

Summary

• Paper uses the P-STAR model to analyze Spanish prices from 1970 to 1996.
• Adds 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.
• Finds the domestic price gap is the major explanatory variable for inflation, even after Spain's entrance in the exchange rate mechanism (ERM).
• Concludes that the successful disinflation experienced in Spain in the past few years may be more related to domestic conditions than to foreign ones.

Methodology

• Empirical framework: P-STAR model with both domestic price gap and foreign price gap included.
• Sample period: 1970 to 1996.
• Focus on assessing the influence of German price movements (foreign price gap) relative to domestic price dynamics.

Key Findings

• Domestic price gap is the dominant explanatory variable for Spanish inflation.
• The dominance of the domestic price gap persists after Spain entered the exchange rate mechanism (ERM).
• Implication that domestic factors played a larger role than foreign ones in Spain's recent disinflation.

Policy implications

• Domestic macroeconomic conditions and policies likely played a central role in Spain's disinflation.
• External price movements (as proxied by German prices) appear secondary to domestic price dynamics in explaining Spanish inflation over 1970–1996.

Publication and metadata

• Authors: Alicia García-Herrero, Manoj Vasant Pradhan
• Publication date: October 1, 1999
• Series: IMF Working Papers
• Series identifier: Working Paper No. 1998/064
• Issue: 064
• Volume: 1998
• Pages: 26
• DOI: https://doi.org/10.5089/9781451848533.001
• Stock No: WPIEA0641998
• ISBN: 9781451848533
• ISSN: 1018-5941
• Subjects: Conventional peg, Exchange rates, Foreign exchange, Inflation, Output gap, Potential output, Prices, Production
• Keywords: Conventional peg, equilibrium price, Europe, Exchange rates, gap, gap decrease, gap effect, Gap terms, gap times, gap variable, Inflation, Output gap, Potential output, price gap, velocity gap, WP

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• The Domestic and Foreign Price Gaps in the P-STAR Model: Evidence from Spain - WP/98/64
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