## Inflation equations derived from the P*-model

The P*-model is presented in Section 8.5.4. The basic variables of the model are calculated in much the same way for Norway as for the Euro area in the previous section. Figure 8.16 shows the price gap (p — p*)t and the real money gap (rm — rm*)t along with the corresponding level series using Norwegian data. The price gap is obtained from equation (8.16) after first applying the HP filter to calculate equilibria for output (y*) and velocity (v*), respectively. As for the Euro area we have used A = 1600 to smooth the output series y* and A = 400 to smooth velocity v*. Then p* can be calculated from (8.14), as well as the price – and real money gaps. It is easily seen from the figure that (p — p*)t = —(rm — rm*)t.

The reference path for money growth A4mt is calculated in a ...

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