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The Real-time Forecasting Performance of Phillips Curves

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Author Info

  • Tim Robinson

    (Reserve Bank of Australia)

  • Andrew Stone

    (Reserve Bank of Australia)

  • Marileze van Zyl

    (Reserve Bank of Australia)

Abstract

Analysts typically use a variety of techniques to forecast inflation. These include both ‘bottom-up’ approaches, for near-term forecasting, as well as econometric methods (such as mark-up models of inflation, which have been found to perform quite well for Australia – see de Brouwer and Ericsson (1998)). One of the econometric approaches to inflation forecasting which is sometimes considered is the use of Phillips curves based on estimates of the output gap. This paper suggests, however, that the real-time capacity of such Phillips curves to forecast inflation is limited, relative even to such simple benchmark forecasting approaches as an autoregressive (AR) model of inflation or a random walk assumption. It appears that the lack of precision with which output-gap-based Phillips curves can be estimated in real time limits their usefulness as a means of forecasting inflation in isolation. Phillips curve-based forecasts may, however, perform a little better than AR model-based ones in at least predicting whether inflation will increase or decrease from its current level. Moreover, combining Phillips curve-based forecasts with those from simple, alternative approaches does seem to offer some scope for improving the real-time forecast accuracy of the latter. These observations suggest that, in spite of their generally disappointing performance as a means of forecasting inflation in isolation, output-gap-based Phillips curves may continue to be useful in real time – as a tool for conditioning gap estimates within a multivariate filtering framework, and as a possible complement to other, alternative inflation forecasting approaches.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2003-12.

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Date of creation: Dec 2003
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Handle: RePEc:rba:rbardp:rdp2003-12

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Keywords: monetary policy; forecasting inflation; output gaps; real-time data;

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References

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  1. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA.
  2. Meredith Beechey & Nargis Bharucha & Adam Cagliarini & David Gruen & Christopher Thompson, 2000. "A Small Model of the Australian Macroeconomy," RBA Research Discussion Papers rdp2000-05, Reserve Bank of Australia.
  3. Nelson, Edward & Nikolov, Kalin, 2001. "UK Inflation in the 1970s and 1980s: The Role of Output Gap Mismeasurement," CEPR Discussion Papers 2999, C.E.P.R. Discussion Papers.
  4. Christopher A. Sims, 2002. "The Role of Models and Probabilities in the Monetary Policy Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 1-62.
  5. West,K.D., 1999. "Encompassing tests when no model is encompassing," Working papers 36, Wisconsin Madison - Social Systems.
  6. David Gruen & Tim Robinson & Andrew Stone, 2002. "Output Gaps in Real Time: Are They Reliable Enough to Use for Monetary Policy?," RBA Research Discussion Papers rdp2002-06, Reserve Bank of Australia.
  7. Gruen, David & Pagan, Adrian & Thompson, Christopher, 1999. "The Phillips curve in Australia," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 223-258, October.
  8. Chong, Yock Y & Hendry, David F, 1986. "Econometric Evaluation of Linear Macro-Economic Models," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 671-90, August.
  9. Andrew Stone & Sharon Wardrop, 2002. "Real-time National Accounts Data," RBA Research Discussion Papers rdp2002-05, Reserve Bank of Australia.
  10. Holden, K & Peel, D A, 1990. "On Testing for Unbiasedness and Efficiency of Forecasts," The Manchester School of Economic & Social Studies, University of Manchester, vol. 58(2), pages 120-27, June.
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Cited by:
  1. Isabell Koske & Nigel Pain, 2008. "The Usefulness of Output Gaps for Policy Analysis," OECD Economics Department Working Papers 621, OECD Publishing.
  2. Paloviita , Maritta & Mayes , David, 2004. "The use of real time information in Phillips curve relationships for the euro area," Research Discussion Papers 16/2004, Bank of Finland.
  3. Matheson, Troy D., 2008. "Phillips curve forecasting in a small open economy," Economics Letters, Elsevier, vol. 98(2), pages 161-166, February.
  4. David Gruen & Tim Robinson & Andrew Stone, 2005. "Output Gaps In Real Time: How Reliable Are They?," The Economic Record, The Economic Society of Australia, vol. 81(252), pages 6-18, 03.
  5. Kitov, Ivan & Kitov, Oleg, 2011. "The Australian Phillips curve and more," MPRA Paper 28762, University Library of Munich, Germany.
  6. Arnulfo Rodríguez & Pedro N. Rodríguez, 2007. "Recursive Thick Modeling and the Choice of Monetary Policy in Mexico," Working Papers 2007-04, Banco de México.
  7. L Christopher Plantier & Ozer Karagedikli, 2005. "Do so-called multivariate filters have better revision properties? An empirical analysis," Computing in Economics and Finance 2005 250, Society for Computational Economics.
  8. Andreas Billmeier, 2009. "Ghostbusting: which output gap really matters?," International Economics and Economic Policy, Springer, vol. 6(4), pages 391-419, December.

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