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Are Phillips curves useful for forecasting inflation?

Author Info

Listed author(s):
  • Andrew Atkeson
  • Lee E. Ohanian

Abstract

This study evaluates the conventional wisdom that modern Phillips curve-based models are useful tools for forecasting inflation. These models are based on the non-accelerating inflation rate of unemployment (the NAIRU). The study compares the accuracy, over the last 15 years, of three sets of inflation forecasts from NAIRU models to the naive forecast that at any date inflation will be the same over the next year as it has been over the last year. The conventional wisdom is wrong; none of the NAIRU forecasts is more accurate than the naive forecast. The likelihood of accurately predicting a change in the inflation rate from these three forecasts is no better than the likelihood of accurately predicting a change based on a coin flip. The forecasts include those from a textbook NAIRU model, those from two models similar to Stock and Watson's, and those produced by the Federal Reserve Board.

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Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (2001)
Issue (Month): Win ()
Pages: 2-11

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Handle: RePEc:fip:fedmqr:y:2001:i:win:p:2-11:n:v.25no.1
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Keywords: Inflation (Finance) ; Forecasting ; Phillips curve;

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  1. Brayton, Flint & Levin, Andrew & Lyon, Ralph & Williams, John C., 1997. "The evolution of macro models at the Federal Reserve Board," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 43-81, December.
  2. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
  3. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
  4. Jonas D. M. Fisher, 2000. "Forecasting inflation with a lot of data," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Mar.
  5. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages 45-61, May.
  6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  7. Stephen G. Cecchetti & Rita S. Chu & Charles Steindel, 2000. "The unreliability of inflation indicators," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 6(Apr).
  8. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
  9. Flint Brayton & Peter A. Tinsley, 1996. "A guide to FRB/US: a macroeconomic model of the United States," Finance and Economics Discussion Series 96-42, Board of Governors of the Federal Reserve System (U.S.).
  10. Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  11. Phelps, Edmund S, 1969. "The New Microeconomics in Inflation and Employment Theory," American Economic Review, American Economic Association, vol. 59(2), pages 147-160, May.
  12. Blinder, Alan S, 1997. "Is There a Core of Practical Macroeconomics That We Should All Believe?," American Economic Review, American Economic Association, vol. 87(2), pages 240-243, May.
  13. David L. Reifschneider & Robert J. Tetlow & John Williams, 1999. "Aggregate disturbances, monetary policy, and the macroeconomy: the FRB/US perspective," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-19.
  14. Reifschneider, David L. & Stockton, David J. & Wilcox, David W., 1997. "Econometric models and the monetary policy process," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 1-37, December.
  15. Flint Brayton & John M. Roberts & John C. Williams, 1999. "What's happened to the Phillips curve?," Finance and Economics Discussion Series 1999-49, Board of Governors of the Federal Reserve System (U.S.).
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Phillips Curves and Fisher Relations
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-12-15 21:00:00
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  1. Econometría Aplicada II

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