IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Forecasting inflation using labour market indicators

  • Vincenzo Cassino
  • Michael Joyce

There are a large number of labour market indicators that could be used by monetary policy makers to assess the state of the labour market and the associated implications for inflationary pressure. This paper attempts to assess their relative merits by evaluating their past performance in forecasting movements in price and wage inflation. This is done by considering both their ex post performance in predicting inflation using conventional in-sample Granger causality tests and their performance ex ante using simulated out-of-sample forecasting tests over the period 1985-2000, based on both recursive and rolling-window estimation. These criteria lead to rather different conclusions. In sample, most labour market indicators appear to be statistically significant in an inflation-forecasting equation, but out of sample a much smaller number of labour market indicator models are better at forecasting inflation than a simple autoregression, with virtually none outperforming this benchmark over the period since 1995. The labour market indicator models that perform relatively well out of sample tend to be sensitive to the precise choice of inflation measure, sample period and estimation method, though there is some evidence that pooling across individual forecasts produces more reliable results. One apparently robust result, however, is that the unemployment rate gap, the most commonly used measure of labour market tightness, performs poorly in out-of-sample forecasts across a range of specifications.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2003/wp195.pdf
Download Restriction: no

Paper provided by Bank of England in its series Bank of England working papers with number 195.

as
in new window

Length:
Date of creation: Jul 2003
Date of revision:
Handle: RePEc:boe:boeewp:195
Contact details of provider: Postal:
Bank of England, Threadneedle Street, London, EC2R 8AH

Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. James H. Stock & Mark W.Watson, 2003. "Forecasting Output and Inflation: The Role of Asset Prices," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 788-829, September.
  2. Levi, Maurice D & Makin, John H, 1980. "Inflation Uncertainty and the Phillips Curve: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 70(5), pages 1022-27, December.
  3. Stephen G. Cecchetti, 1995. "Inflation Indicators and Inflation Policy," NBER Working Papers 5161, National Bureau of Economic Research, Inc.
  4. R. Layard & S. Nickell, 1985. "The Causes of British Unemployment," National Institute Economic Review, National Institute of Economic and Social Research, vol. 111(1), pages 62-85, February.
  5. Blanchard, O & Katz, L, 1996. "What We Know and Do Not Know about the Natural Rate of Unemployment," Working papers 96-29, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Burgess, Simon & Turon, Hélène, 2000. "Unemployment Dynamics, Duration and Equilibrium: Evidence from Britain," CEPR Discussion Papers 2490, C.E.P.R. Discussion Papers.
  7. Athanasios Orphanides & Simon van Norden, 1999. "The reliability of output gap estimates in real time," Finance and Economics Discussion Series 1999-38, Board of Governors of the Federal Reserve System (U.S.).
  8. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270.
  9. Coles, Melvyn G & Smith, Eric, 1994. "Marketplaces and Matching," CEPR Discussion Papers 1048, C.E.P.R. Discussion Papers.
  10. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
  11. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, May.
  12. repec:sae:niesru:v:111:y::i:1:p:62-85 is not listed on IDEAS
  13. James H. Stock & Mark W. Watson, 1994. "Evidence on Structural Instability in Macroeconomic Time Series Relations," NBER Technical Working Papers 0164, National Bureau of Economic Research, Inc.
  14. Nickell, Stephen & Bell, Brian, 1995. "The Collapse in Demand for the Unskilled and Unemployment across the OECD," Oxford Review of Economic Policy, Oxford University Press, vol. 11(1), pages 40-62, Spring.
  15. Mark E. Schweitzer, 2003. "Ready, willing, and able? measuring labour availability in the UK," Working Paper 0303, Federal Reserve Bank of Cleveland.
  16. Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series 0063, European Central Bank.
  17. Nicoletta Batini & Brian Jackson & Stephen Nickell, 2000. "Inflation Dynamics and the Labour Share in the UK," Discussion Papers 02, Monetary Policy Committee Unit, Bank of England.
  18. Layard, Richard & Nickell, Stephen, 1986. "Unemployment in Britain," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S121-69, Supplemen.
  19. Mark S Astley & Tony Yates, 1999. "Inflation and real disequilibria," Bank of England working papers 103, Bank of England.
  20. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, May.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:195. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Media Team)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.