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Posterior-Predictive Evidence on US Inflation using Extended Phillips Curve Models with Non-filtered Data

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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, VU University Amsterdam)

Abstract

Changing time series properties of US inflation and economic activity, measured as marginal costs, are modeled within a set of extended Phillips Curve (PC) models. It is shown that mechanical removal or modeling of simple low frequency movements in the data may yield poor predictive results which depend on the model specification used. Basic PC models are extended to include structural time series models that describe typical time varying patterns in levels and volatilities. Forward as well as backward looking expectation mechanisms for inflation are incorporated and their relative importance evaluated. Survey data on expected inflation are introduced to strengthen the information in the likelihood. Use is made of simulation based Bayesian techniques for the empirical analysis. No credible evidence is found on endogeneity and long run stability between inflation and marginal costs. Backward-looking inflation appears stronger than forward-looking one. Levels and volatilities of inflation are estimated more precisely using rich PC models. Estimated inflation expectations track nicely the observed long run inflation from the survey data. The extended PC structures compare favorably with existing basic Bayesian Vector Autoregressive and Stochastic Volatility models in terms of fit and prediction. 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 13-090/III.

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Date of creation: 16 Jul 2013
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Handle: RePEc:dgr:uvatin:20130090

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

Related research

Keywords: New Keynesian Phillips curve; unobserved components; time varying parameters; level shifts; inflation expectations; survey data;

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References

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  1. Frank Schorfheide, 2003. "Learning and monetary policy shifts," Working Paper 2003-23, Federal Reserve Bank of Atlanta.
  2. 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.
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  9. Kim, Sangjoon & Shephard, Neil & Chib, Siddhartha, 1998. "Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 361-93, July.
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