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Posterior-Predictive Evidence on US Inflation using Phillips Curve Models with Non-Filtered Time Series

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Author Info

  • Nalan Basturk

    (Erasmus University Rotterdam)

  • Cem Cakmakli

    (University of Amsterdam)

  • Pinar Ceyhan

    (Erasmus University Rotterdam)

  • Herman K. van Dijk

    (Erasmus University Rotterdam, and VU University Amsterdam)

Abstract

Changing time series properties of US inflation and economic activity are analyzed within a class of extended Phillips Curve (PC) models. First, the misspecification effects of mechanical removal of low frequency movements of these series on posterior inference of a basic PC model are analyzed using a Bayesian simulation based approach. Next, structural time series models that describe changing patterns in low and high frequencies and backward as well as forward inflation expectation mechanisms are incorporated in the class of extended PC models. Empirical results indicate that the proposed models compare favorably with existing Bayesian Vector Autoregressive and Stochastic Volatility models in terms of fit and predictive performance. Weak identification and dynamic persistence appear less important when time varying dynamics of high and low frequencies are carefully modeled. Modeling inflation expectations using survey data and adding level shifts and stochastic volatility improves substantially in sample fit and out of sample predictions. No evidence is found of a long run stable cointegration relation between US inflation and marginal costs. Tails of the complete predictive distributions indicate an increase in the probability of disinflation in recent years.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 13-011/III.

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Date of creation: 10 Jan 2013
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Handle: RePEc:dgr:uvatin:20130011

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Web page: http://www.tinbergen.nl

Related research

Keywords: New Keynesian Phillips curve; unobserved components; level shifts; inflation expectations;

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References

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Cited by:
  1. Michal Andrle & Jan Bruha & Serhat Solmaz, 2013. "Inflation and Output Comovement in the Euro Area: Love at Second Sight?," Working Papers 2013/07, Czech National Bank, Research Department.
  2. Jaromir Baxa & Miroslav Plasil & Borek Vasicek, 2013. "Inflation and the Steeplechase Between Economic Activity Variables," Working Papers 2013/15, Czech National Bank, Research Department.
  3. Monica Billio & Roberto Casarin & Francesco Ravazzolo & Herman K. van Dijk, 2013. "Interactions between eurozone and US booms and busts: A Bayesian panel Markov-switching VAR model," Working Paper 2013/20, Norges Bank.
  4. Michal Andrle & Jan Bruha & Serhat Solmaz, 2013. "Inflation and Output Comovement in the Euro Area," IMF Working Papers 13/192, International Monetary Fund.

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