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Comparing the New Keynesian Phillips Curve with time series models to forecast inflation

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  • Rumler, Fabio
  • Valderrama, Maria Teresa

Abstract

The New Keynesian Phillips Curve, as a structural model of inflation dynamics, has mostly been used to explain past inflation developments, but has hardly been used for forecasting purposes. We propose a method of forecasting inflation based on the present-value formulation of the hybrid New Keynesian Phillips Curve. To evaluate the forecasting performance of this model we compare it with forecasts generated from a traditional Phillips Curve and time series models at different forecast horizons. As state-of-the-art time series models used in forecasting we employ a Bayesian VAR, a conventional VAR and a simple autoregressive model. We find that the New Keynesian Phillips Curve delivers relatively more accurate forecasts of inflation in Austria compared to the other models for longer forecast horizons (more than 3 months) while they are outperformed by the time series models only for the very short forecast horizon. This is consistent with the finding in the literature that structural models are able to outperform time series models only for longer horizons.

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Bibliographic Info

Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 21 (2010)
Issue (Month): 2 (August)
Pages: 126-144

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Handle: RePEc:eee:ecofin:v:21:y:2010:i:2:p:126-144

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Web page: http://www.elsevier.com/locate/inca/620163

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Keywords: New Keynesian Phillips Curve Inflation forecasting Forecast evaluation Bayesian VAR;

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  1. Canova, Fabio, 2007. "G-7 Inflation Forecasts: Random Walk, Phillips Curve Or What Else?," Macroeconomic Dynamics, Cambridge University Press, vol. 11(01), pages 1-30, February.
  2. Argia M. Sbordone, 2001. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Departmental Working Papers 199822, Rutgers University, Department of Economics.
  3. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
  4. Glatzer, Ernst & Rumler, Fabio & Baumgartner, Josef & Stiglbauer, Alfred, 2005. "How Frequently Do Consumer Prices Change in Austria? Evidence from Micro CPI Data," Working Papers 101, Oesterreichische Nationalbank (Austrian Central Bank).
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  7. James M. Nason & Gregor W. Smith, 2008. "Identifying the new Keynesian Phillips curve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(5), pages 525-551.
  8. Caesar Lack, 2006. "Forecasting Swiss inflation using VAR models," Economic Studies 2006-02, Swiss National Bank.
  9. Rumler, Fabio, 2005. "Estimates of the open economy New Keynesian Phillips curve for euro area countries," Working Paper Series 0496, European Central Bank.
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  14. Kenny, Geoff & Meyler, Aidan & Quinn, Terry, 1998. "Bayesian Var Models for Forecasting Irish Inflation," Research Technical Papers 4/RT/98, Central Bank of Ireland.
  15. Valderrama, Maria Teresa & Rumler, Fabio, 2008. "Do Aggregate Demand Factors Influence Current Inflation Developments?," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 10–82.
  16. Jordi Gali & Mark Gertler & David Lopez-Salido, 2005. "Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve," NBER Working Papers 11788, National Bureau of Economic Research, Inc.
  17. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  18. Campbell Leith & Jim Malley, 2002. "Estimated Open Economy New Keynesian Phillips Curves for the G7," Working Papers 2002_8, Business School - Economics, University of Glasgow.
  19. James H. Stock & Mark W. Watson, 2008. "Phillips Curve Inflation Forecasts," NBER Working Papers 14322, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Ivan Kitov & Oleg Kitov, 2013. "Inflation, unemployment, and labour force. Phillips curves and long-term projections for Austria," Papers 1310.1786, arXiv.org.
  2. Dandan Liu & Dennis Jansen, 2011. "Does a factor Phillips curve help? An evaluation of the predictive power for U.S. inflation," Empirical Economics, Springer, vol. 40(3), pages 807-826, May.
  3. Henzel, Steffen R. & Mayr, Johannes, 2013. "The mechanics of VAR forecast pooling—A DSGE model based Monte Carlo study," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 1-24.

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