Advanced Search
MyIDEAS: Login to save this paper or follow this series

Why Has U.S. Inflation Become Harder to Forecast?

Contents:

Author Info

  • James H. Stock
  • Mark W. Watson

Abstract

Forecasts of the rate of price inflation play a central role in the formulation of monetary policy, and forecasting inflation is a key job for economists at the Federal Reserve Board. This paper examines whether this job has become harder and, to the extent that it has, what changes in the inflation process have made it so. The main finding is that the univariate inflation process is well described by an unobserved component trend-cycle model with stochastic volatility or, equivalently, an integrated moving average process with time-varying parameters; this model explains a variety of recent univariate inflation forecasting puzzles. It appears currently to be difficult for multivariate forecasts to improve on forecasts made using this time-varying univariate model.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w12324.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12324.

as in new window
Length:
Date of creation: Jun 2006
Date of revision:
Publication status: published as Stock, James H. and Mark W. Watson. "Why Has U.S. Inflation Become Harder to Forecast?" Journal of Money, Credit and Banking 39, s1 (2007): 13 - 33.
Handle: RePEc:nbr:nberwo:12324

Note: EFG ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Athanasios Orphanides & Simon van Norden, 2003. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," CIRANO Working Papers, CIRANO 2003s-01, CIRANO.
  2. Nelson, Charles R & Schwert, G William, 1977. "Short-Term Interest Rates as Predictors of Inflation: On Testing the Hypothesis That the Real Rate of Interest is Constant," American Economic Review, American Economic Association, American Economic Association, vol. 67(3), pages 478-86, June.
  3. M. Dossche & G. Everaert, 2005. "Measuring inflation persistence: a structural time series approach," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 05/340, Ghent University, Faculty of Economics and Business Administration.
  4. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, Econometric Society, vol. 61(4), pages 821-56, July.
  5. Mavroeidis, Sophocles, 2005. "Identification Issues in Forward-Looking Models Estimated by GMM, with an Application to the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 37(3), pages 421-48, June.
  6. Jonas D. M. Fisher & Chin Te Liu & Ruilin Zhou, 2002. "When can we forecast inflation?," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q I, pages 32-44.
  7. Clark, Todd E. & McCracken, Michael W., 2006. "The Predictive Content of the Output Gap for Inflation: Resolving In-Sample and Out-of-Sample Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(5), pages 1127-1148, August.
  8. Harvey, A.C. & Trimbur, T.M. & van Dijk, H.K., 2005. "Trends and cycles in economic time series: A Bayesian approach," Econometric Institute Research Papers EI 2005-27, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  9. James H. Stock & Mark W.Watson, 2003. "Forecasting Output and Inflation: The Role of Asset Prices," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 788-829, September.
  10. Barsky, Robert B., 1987. "The Fisher hypothesis and the forecastability and persistence of inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 19(1), pages 3-24, January.
  11. Andrew Ang & Geert Bekaert & Min Wei, 2006. "Do macro variables, asset markets, or surveys forecast inflation better?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2006-15, Board of Governors of the Federal Reserve System (U.S.).
  12. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(2), pages 293-335, October.
  13. Pivetta, Frederic & Reis, Ricardo, 2007. "The persistence of inflation in the United States," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(4), pages 1326-1358, April.
  14. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
  15. Daniel Leigh, 2005. "Estimating the Implicit Inflation Target," IMF Working Papers 05/77, International Monetary Fund.
  16. Arturo Estrella, 2005. "Why Does the Yield Curve Predict Output and Inflation?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(505), pages 722-744, 07.
  17. Donald L. Kohn, 2005. "Modeling inflation: a policymaker's perspective : a speech to the International Research Forum on Monetary Policy Conference, Frankfurt am Main, Germany, May 20, 2005," Speech, Board of Governors of the Federal Reserve System (U.S.) 102, Board of Governors of the Federal Reserve System (U.S.).
  18. Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
  19. Flint Brayton & John M. Roberts & John C. Williams, 1999. "What's happened to the Phillips curve?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-49, Board of Governors of the Federal Reserve System (U.S.).
  20. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 3(3), pages 216-27, June.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Bernanke: Inflation Expectations and Inflation Forecasting
    by Mark Thoma in Economist's View on 2007-07-10 20:08:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:12324. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.