A TEST OF THE P-STAR MODEL

This paper presents a test of the P-Star model using US quarterly data over the period 1951:1-1991:4. The basic formulation of the P-Star mo del, which is derived from the quantity theory of money, is manipulate d to obtain an equation for the price level in terms of a stochastic t rend and the actual levels of output and velocity. The maximum likelih ood estimation results verify the validity of the model and the import ance of the stochastic trend. The dynamic relationship between the inf lation rate and the price gap is also estimated, producing a large and significant value for the coefficient of adjustment.