A P* Approach to Price Adjustment in Developing Countries: A Panel Study

Morling, Steven (2002) A P* Approach to Price Adjustment in Developing Countries: A Panel Study. Discussion Paper No. 306, School of Economics, The University of Queensland.

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Author Morling, Steven
Title A P* Approach to Price Adjustment in Developing Countries: A Panel Study
School, Department or Centre School of Economics
Institution The University of Queensland
Report Number Discussion Paper No. 306
Publication date 2002-05-01
Subject 340208 Macroeconomics (incl. Monetary and Fiscal Theory)
Abstract/Summary This paper examines the role of disequilibrium conditions in influencing price adjustment processes in developing countries. Measures of real and financial sector disequilibrium are constructed for a sample of 58 developing countries over the period 1973-1998 using structural VAR methodology. Panel data techniques are used to estimate a reduced-form P* model. Overall the results suggest that inflation expectations are relatively forward looking in developing countries. This is consistent with the elevated inflation rates that many of these countries have experienced over long periods of time. The evidence for the role of real or financial sector disequilibrium conditions in the price adjustment process is limited. The output gap is significant for most countries, with the negative sign suggesting that temporary fluctuations in output, and subsequent price adjustment processes, reflect the response of output and prices to temporary supply shocks. The velocity gap does not seem to play an important role, and the external price gap appears only to be significant for the African and Western Hemisphere regions.
Keyword price adjustment
developing countries
inflation
disequilibrium conditions

Document type: Department Technical Report
Collection: Discussion Papers (School of Economics)
 
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Created: Wed, 14 Jul 2004, 10:00:00 EST by John East