Do Phillips curves conditionally help to forecast inflation?
AbstractThe Phillips curve has long been used as a foundation for forecasting inflation. Yet numerous studies indicate that over the past 20 years or so, inflation forecasts based on the Phillips curve generally do not predict inflation any better than a univariate forecasting model. In this paper, the authors take a deeper look at the forecasting ability of Phillips curves from both an unconditional and a conditional view. Namely, they use the test results developed by Giacomini and White (2006) to examine the forecasting ability of Phillips curve models. The authors' main results indicate that forecasts from their Phillips curve models are unconditionally inferior to those of their univariate forecasting models and sometimes the difference is statistically significant. However, the authors do find that conditioning on various measures of the state of the economy does at times improve the performance of the Phillips curve model in a statistically significant way. Of interest is that improvement is more likely to occur at longer forecasting horizons and over the sample period 1984Q1—2010Q3. Strikingly, the improvement is asymmetric — Phillips curve forecasts tend to be more accurate when the economy is weak and less accurate when the economy is strong. It, therefore, appears that forecasters should not fully discount the inflation forecasts of Phillips curve-based models when the economy is weak.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 11-40.
Date of creation: 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-09 (All new papers)
- NEP-CBA-2011-10-09 (Central Banking)
- NEP-FOR-2011-10-09 (Forecasting)
- NEP-MAC-2011-10-09 (Macroeconomics)
- NEP-MON-2011-10-09 (Monetary Economics)
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