The Relevance of P-Star Analysis to UK Monetary Policy

Recent articles have attempted to restore the use of a simple measure of the money supply as an indicator of future price levels, P[star], and to reestablish a causal link from money to prices. In this paper we argue that the P[star] approach is flawed. It is certainly more complex than traditional monetarist approaches but the fundamental questions of causality are in no way either affected or resolved. We argue that the P[star] relationship does not have a causal link with prices but rather the causality runs from prices to money. We also find that there is some causality running from money to real income, so that monetary conditions do seem to have some predictive power for future levels of activity.