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Improving Phillips Curve’s Inflation Forecasts under Misspecification

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  • Mamdouh Abdelmoula M. ABDELSALAM

    (Department of Economics, University of Leicester, UK and Menoufia University, Egypt.)

Abstract

The Philips Curve (PC) is empirically criticized as falling short on many occasions in its predictability power of inflation due to an inherent deficiency in its specification features. This study is an attempt to improve the accuracy of Philips Curve forecasts. It considers various econometric specifications and estimation methods and different measures of the business cycle. In addition to the traditional New Keynesian open economy PC, we analyze some augmented versions with other information which incorporates the monetary variables such as the price gap. Additionally, we propose two different identifications for PC with time varying coefficients: the Time-Varying Coefficients with Random Walk (TVCR) coefficients and the Time Varying Coefficient (TVC). TVC allows us to confront directly specification biases and spurious relationships; this is usually the case for PC under the traditional estimation approaches. Moreover, we employ some static and dynamic forecast combination techniques. We find that PC with TVC provides the most accurate forecasts.

Suggested Citation

  • Mamdouh Abdelmoula M. ABDELSALAM, 2017. "Improving Phillips Curve’s Inflation Forecasts under Misspecification," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 54-76, September.
    • Handle: RePEc:rjr:romjef:v::y:2017:i:3:p:54-76
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    References listed on IDEAS

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    Cited by:

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    2. Nermeen Harb & Mamdouh Abdelmoula M. Abdelsalam, 2019. "Effect Of Oil Prices On Stock Markets: Evidence From New Generation Of Star Model," Bulletin of Economic Research, Wiley Blackwell, vol. 71(3), pages 466-482, July.
    3. Hany Guirguis & Vaneesha Boney Dutra & Zoe McGreevy, 2022. "The impact of global economies on US inflation: A test of the Phillips curve," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(3), pages 575-592, July.

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    More about this item

    Keywords

    forecasting inflation; Phillips Curve; misspecification; time-varying coefficients; model averaging; business cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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