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The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time

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  • Athanasios Orphanides
  • Simon van Norden

    ()

Abstract

A stable predictive relationship between inflation and the output gap, often referred to as a Phillips curve, provides the basis for empirical formulations of countercyclical monetary policy in many models. In this paper, we provide an empirical evaluation of the usefulness of alternative univariate and multivariate estimates of the output gap for predicting inflation. In-sample analysis based on ex post output gap measures suggests that many of the alternative estimates we examine appear to be quite useful for predicting inflation. However, examination of out-of-sample forecasts using real-time estimates of the same measures suggests that this predictive ability is mostly illusory. We find that the usefulness of output gaps as predictors of inflation has been severely overstated and that real-time forecasts using the output gap are often less accurate than forecasts that abstract from the output gap concept altogether. Dans ce papier, on jauge l'utilité de plusieurs estimations (univariées autant que multivariées) de l'écart de production pour prévoir le taux d'inflation. Une analyse ex post suggère que plusieurs de ces estimations aident à prédire l'inflation. Néanmoins, les erreurs de prédictions hors de l'enchantillon qui se sont construites avec les écarts de production estimés en temps réel indiquent que cette amélioration de prédiction est illusoire. On trouve que l'utilité des écarts de production pour prédire l'inflation a été exagérée et que les prédictions faites avec l'écart de production sont souvent moins précises que celles qui ignorent le concept d'un écart de production.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2003s-01.

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Date of creation: 01 Jan 2003
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Handle: RePEc:cir:cirwor:2003s-01

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Keywords: Phillips curve; output gap; inflation forecasts; real-time data; La courbe de Phillips; l'écart de production; des prévisions d'inflation; des données en temps réel;

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  1. The output gap is the trojan horse of the fiscal compact
    by florincitu in FlorinCitu on 2012-02-20 18:51:00
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