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Model Specification and Inflation Forecast Uncertainty

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Author Info

  • Gunnar Bårdsen

    ()
    (Department of Economics, Norwegian University of Science and Technology)

  • Eilev S. Jansen

    ()
    (Bank of Norway and Department of Economics, Norwegian University of Science and Technology)

  • Ragnar Nymoen

    ()
    (Department of Economics, University of Oslo)

Abstract

Three classes of inflation models are discussed: Standard Phillips curves, New Keynesian Phillips curves and Incomplete Competition models. Their relative merits in explaining and forecasting inflation are investigated theoretically and empirically. We establish that Standard Phillips-curve forecasts are robust to types of structural breaks that harm the Incomplete Competion model forecasts, but exaggerate forecast uncertainty in periods with no breaks. As the potential biases in after-break forecast errors for the Incomplete Competition model can be remedied by intercept corrections, it offers the best prospect of successful inflation forecasting.

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Bibliographic Info

Paper provided by Department of Economics, Norwegian University of Science and Technology in its series Working Paper Series with number 1302.

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Length: 28 pages
Date of creation: 28 Apr 2000
Date of revision: 29 Jan 2002
Handle: RePEc:nst:samfok:1302

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Keywords: monetary policy; inflation targeting; wages and prices; model specification; encompassing; model uncertainty; forecasting;

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References

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Citations

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Cited by:
  1. Bårdsen, Gunnar & Jansen, Eilev S. & Nymoen, Ragnar, 2003. "Testing the New Keynesian Phillips curve," Memorandum 18/2002, Oslo University, Department of Economics.
  2. Ragnar Nymoen & Gunnar Bardsen & Eilev S. Jansen, 2004. "The empirical relevance of the New Keynesian Phillips curve," Econometric Society 2004 North American Winter Meetings 328, Econometric Society.
  3. Q. Farooq Akram & Ragnar Nymoen, 2006. "Model selection for monetary policy analysis – Importance of empirical validity," Working Paper 2006/13, Norges Bank.
  4. Nymoen, Ragnar, 2005. "Evaluating a Central Bank’s Recent Forecast Failure," Memorandum 22/2005, Oslo University, Department of Economics.
  5. Gunnar Bårdsen & Eilev S. Jansen & Ragnar Nymoen, 2002. "The Empirical (ir)Relevance of the New Keynesian Phillips Curve," Working Paper Series 2102, Department of Economics, Norwegian University of Science and Technology.

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