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Revisiting the forecasting accuracy of Phillips curve: The role of oil price

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  • Salisu, Afees A.
  • Ademuyiwa, Idris
  • Isah, Kazeem O.

Abstract

In this paper, we propose a revision to the traditional (demand side) Phillips curve to capture the supply (cost-push) side of inflation. We adopt the Westerlund and Narayan [WN] (2015) approach which accounts for persistence, endogeneity and conditional heteroscedasticity effects in the predictive regression model. In addition, following the approach of Salisu and Isah (2018), we extend the oil-based bivariate framework of WN (2015) to a multi-predictor set-up in order to augment the traditional Phillips curve-based inflation model with the proposed cost-push factor. Using the OECD countries, we demonstrate that the forecast performance of the traditional Phillips curve tends to improve when it is augmented with oil price both for the in-sample and out-of-sample forecasts. Contrary to the prominent findings in the literature, the augmented Phillips curve model outperforms the first order autoregressive model. Our results are robust to alternative measures of inflation rate and different forecast horizons.

Suggested Citation

  • Salisu, Afees A. & Ademuyiwa, Idris & Isah, Kazeem O., 2018. "Revisiting the forecasting accuracy of Phillips curve: The role of oil price," Energy Economics, Elsevier, vol. 70(C), pages 334-356.
  • Handle: RePEc:eee:eneeco:v:70:y:2018:i:c:p:334-356
    DOI: 10.1016/j.eneco.2018.01.018
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    More about this item

    Keywords

    OECD countries; Phillips curve; Oil price; Inflation forecasts; Forecast evaluation;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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