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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620163

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  4. James M. Nason & Gregor W. Smith, 2005. "Identifying the New Keynesian Phillips Curve," Working Papers 1026, Queen's University, Department of Economics.
  5. Fabio Rumler & Maria Teresa Valderrama, 2008. "Do Aggregate Demand Factors Influence Current Inflation Developments?," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 10–82.
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  10. Adolfson, Malin & Lindé, Jesper & Villani, Mattias, 2005. "Forecasting Performance of an Open Economy Dynamic Stochastic General Equilibrium Model," Working Paper Series 190, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2006.
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  13. Kenny, Geoff & Meyler, Aidan & Quinn, Terry, 1998. "Bayesian VAR Models for Forecasting Irish Inflation," MPRA Paper 11360, University Library of Munich, Germany.
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  18. Baumgartner, Josef & Glatzer, Ernst & Rumler, Fabio & Stiglbauer, Alfred, 2005. "How frequently do consumer prices change in Austria? Evidence from micro CPI data," Working Paper Series 0523, European Central Bank.
  19. John C. Robertson & Ellis W. Tallman, 1999. "Vector autoregressions: forecasting and reality," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 4-18.
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