THE P-STAR MODEL APPROACH OF LINKING MONEY AND PRICES IN SRI LANKA: SOME EMPIRICAL EVIDENCE

More recently, the P-Star approach of modeling inflation, proposed by Hallman et al. (1989), has been widely tested for the United States and other developed countries. However, the applicability of the P-Star model for developing countries is yet to be determined. Thus, the main purpose of the paper is to add to the current literature on the robustness of the P-Star approach with respect to a developing country, Sri Lanka. Using a sample period of 1981:1 to 1994:4, the results of the study suggest that the monetary data for Sri Lanka supported the P-Star model. The author concludes that there is a close relationship between money and the price level in Sri Lanka.