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A state-dependent model for inflation forecasting

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  • Andrea Stella
  • James H. Stock

Abstract

We develop a parsimonious bivariate model of inflation and unemployment that allows for persistent variation in trend inflation and the NAIRU. The model, which consists of five unobserved components (including the trends) with stochastic volatility, implies a time-varying VAR for changes in the rates of inflation and unemployment. The implied backwards-looking Phillips curve has a time-varying slope that is steeper in the 1970s than in the 1990s. Pseudo out-of-sample forecasting experiments indicate improvements upon univariate benchmarks. Since 2008, the implied Phillips curve has become steeper and the NAIRU has increased.

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File URL: http://www.federalreserve.gov/pubs/ifdp/2012/1062/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/2012/1062/ifdp1062.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1062.

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Date of creation: 2012
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Handle: RePEc:fip:fedgif:1062

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  1. Gambetti, Luca & D’Agostino, Antonello & Giannone, Domenico, 2010. "Macroeconomic forecasting and structural change," Working Paper Series 1167, European Central Bank.
  2. Laurence M. Ball & Sandeep Mazumder, 2011. "Inflation Dynamics and the Great Recession," NBER Working Papers 17044, National Bureau of Economic Research, Inc.
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Cited by:
  1. Joshua C.C. Chan & Gary Koop & Simon M. Potter, 2014. "A Bounded Model of Time Variation in Trend Inflation, NAIRU and the Phillips Curve," CAMA Working Papers 2014-10, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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