ABSTRACT
Empirical studies have shown that different monetary aggregates used to construct P-Star have different implications for the performance of the P-Star approach. The P-Star model approach has only been widely tested in the developed countries. The empirical results obtained for the majority of the developed countries are supportive of the P-Star approach. The chapter investigates the long-run relationship between Divisia money and the price level of ten Asian countries. If money is to have a useful role in the Central Bank’s policy process, at least two fundamental questions must be answered. First, how close is the relationship between money and the general price level in the economy? Second, insofar as money remains a useful predictor of inflation, which measure of money should receive the most attention? In a standard reduced-form model, the determinants of inflation range from money supply, wages, productivity, import prices, and exchange rates.
