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Comparing the New Keynesian Phillips Curve with time series models to forecast inflation

  • Rumler, Fabio
  • Valderrama, Maria Teresa

The New Keynesian Phillips Curve, as a structural model of inflation dynamics, has mostly been used to explain past inflation developments, but has hardly been used for forecasting purposes. We propose a method of forecasting inflation based on the present-value formulation of the hybrid New Keynesian Phillips Curve. To evaluate the forecasting performance of this model we compare it with forecasts generated from a traditional Phillips Curve and time series models at different forecast horizons. As state-of-the-art time series models used in forecasting we employ a Bayesian VAR, a conventional VAR and a simple autoregressive model. We find that the New Keynesian Phillips Curve delivers relatively more accurate forecasts of inflation in Austria compared to the other models for longer forecast horizons (more than 3 months) while they are outperformed by the time series models only for the very short forecast horizon. This is consistent with the finding in the literature that structural models are able to outperform time series models only for longer horizons.

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Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 21 (2010)
Issue (Month): 2 (August)
Pages: 126-144

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Handle: RePEc:eee:ecofin:v:21:y:2010:i:2:p:126-144
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  1. Canova, Fabio, 2007. "G-7 Inflation Forecasts: Random Walk, Phillips Curve Or What Else?," Macroeconomic Dynamics, Cambridge University Press, vol. 11(01), pages 1-30, February.
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  8. Fabio Rumler, 2005. "Estimates of the Open Economy New Keynesian Phillips Curve for Euro Area Countries," Working Papers 102, Oesterreichische Nationalbank (Austrian Central Bank).
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  18. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
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