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

Monetary policy and forecasting inflation with and without the output gap

Contents:

Author Info

Abstract

Some observers have worried that under or over-estimating the output gap may unnecessarily induce tightening or loosening of monetary conditions, causing real fluctuations. To investigate the relationship between the output gap and inflation, we examine models of inflation that do and do not use the output gap. The Phillips curve, which relates inflation to real activity, is regarded as the maintained theory of inflation. Models of inflation without the output gap include the equation of exchange of the quantity theory of money, the real interest rate gap, and two versions of the P* model. Since none of these economic models are either totally wrong nor complete, it makes sense to diversify across models rather than relying on one model exclusively. The forecasts derived from different stable models can be combined through averaging, which offsets biases and reduces the forecast error variance. Such model diversification spreads the risks of errors (i.e., insurance about bad outcomes that arise from the reliance on a single model) and provides greater robustness for policy. This paper examines ten different models of inflation and estimates sixty-seven different specifications, some of which outperform others. Some explanatory variables like money and the real interest rate gap seem to provide more information about future inflation than does estimates of output gap.

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.rbnz.govt.nz/research_and_publications/discussion_papers/2002/dp02_03.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2002/03.

as in new window
Length: 76p
Date of creation: Mar 2002
Date of revision:
Handle: RePEc:nzb:nzbdps:2002/03

Contact details of provider:
Postal: P.O. Box 2498, Wellington
Phone: 64 4 471-3767
Fax: 64 4 471-2270
Email:
Web page: http://www.rbnz.govt.nz
More information through EDIRC

Related research

Keywords:

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. David Hendry & Michael P. Clements, 2001. "Economic Forecasting: Some Lessons from Recent Research," Economics Series Working Papers, University of Oxford, Department of Economics 78, University of Oxford, Department of Economics.
  2. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
  3. John M. Roberts, 2001. "How well does the New Keynesian sticky-price model fit the data?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-13, Board of Governors of the Federal Reserve System (U.S.).
  4. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(4), pages 1295-1328, November.
  5. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(3), pages 553-578, June.
  6. Fair, Ray C, 1993. "Testing the Rational Expectations Hypothesis in Macroeconometric Models," Oxford Economic Papers, Oxford University Press, Oxford University Press, vol. 45(2), pages 169-90, April.
  7. Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
  8. Orphanides, Athanasios & van Norden, Simon, 2005. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 37(3), pages 583-601, June.
  9. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(8), pages 1649-1672, November.
  10. Orphanides, Athanasios, 2001. "Monetary policy rules, macroeconomic stability and inflation: a view from the trenches," Working Paper Series, European Central Bank 0115, European Central Bank.
  11. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2139, C.E.P.R. Discussion Papers.
  12. Guy Meredith & Bankim Chadha & Paul R. Masson, 1991. "Models of Inflation and the Costs of Disinflation," IMF Working Papers, International Monetary Fund 91/97, International Monetary Fund.
  13. Katharine S. Neiss & Edward Nelson, 2001. "The real interest rate gap as an inflation indicator," Bank of England working papers, Bank of England 130, Bank of England.
  14. Brunner, Karl & Cukierman, Alex & Meltzer, Allan H., 1983. "Money and economic activity, inventories and business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 11(3), pages 281-319.
  15. Thomas Laubach & John C. Williams, 2001. "Measuring the natural rate of interest," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-56, Board of Governors of the Federal Reserve System (U.S.).
  16. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  17. Athanasios Orphanides, 1998. "Monetary policy evaluation with noisy information," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-50, Board of Governors of the Federal Reserve System (U.S.).
  18. Bennett T. McCallum & Edward Nelson, 1998. "Performance of operational policy rules in an estimated semi-classical structural model," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  19. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(1), pages 191-205, February.
  20. Jordi Galí & Mark Gertler & J. David López-Salido, 2000. "European Inflation Dynamics," Banco de Espa�a Working Papers, Banco de Espa�a 0020, Banco de Espa�a.
  21. Fair Ray C, 2002. "On Modeling the Effects of Inflation Shocks," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 2(1), pages 1-21, April.
  22. Clemens J. M. Kool & John A. Tatom, 1994. "The P-star model in five small economies," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 11-29.
  23. David Gruen & Adrian Pagan & Christopher Thompson, 1999. "The Phillips Curve in Australia," RBA Research Discussion Papers, Reserve Bank of Australia rdp1999-01, Reserve Bank of Australia.
  24. Hamid Faruqee & Douglas Laxton & Bart Turtelboom & Peter Isard & Eswar Prasad, 1998. "Multimod Mark III," IMF Occasional Papers, International Monetary Fund 164, International Monetary Fund.
  25. Joanne Archibald & Leni Hunter, 2001. "What is the neutral real interest rate, and how can we use it?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 64, September.
  26. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc.
  27. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers, Princeton, Department of Economics - Econometric Research Program 338, Princeton, Department of Economics - Econometric Research Program.
  28. Pagan, Adrian, 1974. "A Generalised Approach to the Treatment of Autocorrelation," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 13(23), pages 267-80, December.
  29. Lawrence J. Christiano, 1989. "P*: not the inflation forecaster's holy grail," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-18.
  30. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  31. Elliott, Graham, 1999. "Efficient Tests for a Unit Root When the Initial Observation Is Drawn from Its Unconditional Distribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 767-83, August.
  32. Ray C. Fair, 2001. "Is There Empirical Support for the 'Modern' View of Macroeconomics?," Yale School of Management Working Papers, Yale School of Management ysm201, Yale School of Management.
  33. Granger, Clive W. J. & Jeon, Yongil, 2004. "Thick modeling," Economic Modelling, Elsevier, Elsevier, vol. 21(2), pages 323-343, March.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. W A Razzak, 2007. "A Perspective on Unit Root and Cointegration in Applied Macroeconomics," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 4(1), pages 77-102.
  2. Basdevant, Olivier, 2005. "Learning process and rational expectations: An analysis using a small macro-economic model for New Zealand," Economic Modelling, Elsevier, Elsevier, vol. 22(6), pages 1074-1089, December.
  3. L Christopher Plantier & Dean Scrimgeour, 2002. "Estimating a Taylor Rule for New Zealand with a time-varying neutral real rate," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP2002/06, Reserve Bank of New Zealand.
  4. Pami Dua & Gaur Upasna, 2009. "Determination of Inflation in an Open Economy Phillips Curve Framework: The Case of Developed and Developing Asian Countries," Working Papers id:1973, eSocialSciences.
  5. Olivier Basdevant & David Hargreaves, 2003. "Modelling structural change: the case of New Zealand," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP2003/03, Reserve Bank of New Zealand.
  6. Kandil, Magda, 2005. "Money, interest, and prices: Some international evidence," International Review of Economics & Finance, Elsevier, Elsevier, vol. 14(2), pages 129-147.
  7. Hans-Eggert Reimers, 2003. "Does Money Include Information for Prices in the Euro Area?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 223(5), pages 581-602, September.
  8. SOOREEA, Rajeev, 2007. "Are Taylor-Based Monetary Policy Rules Forward-Looking?. An Investigation Using Superexogeneity Tests," Applied Econometrics and International Development, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 7(2), pages 87-94.
  9. Olivier Basdevant, 2003. "Learning process and rational expectations: an analysis using a small macroeconomic model for New Zealand," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP2003/05, Reserve Bank of New Zealand.
  10. Yap, Josef T., 2003. "The Output Gap and Its Role in Inflation-Targeting in the Philippines," Discussion Papers, Philippine Institute for Development Studies DP 2003-10, Philippine Institute for Development Studies.
  11. Michael Graff, 2004. "Estimates of the output gap in real time: how well have we been doing?," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP 2004/04, Reserve Bank of New Zealand.

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:nzb:nzbdps:2002/03. 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: (Reserve Bank of New Zealand Knowledge Centre).

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.