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NKPC-Based Inflation Forecasts with a Time-Varying Trend

Author

Listed:
  • Stephen McKnight

    (El Colegio de México)

  • Alexander Mihailov

    (University of Reading)

  • Fabio Rumler

    (Oesterreichische Nationalbank)

Abstract

Does theory aid inflation forecasting? This paper develops a forecasting procedure based upon a generalized New Keynesian Phillips Curve that in- corporates time-varying trend inflation. Using quarterly data for the Euro Area and the United States over the period 1970-2015, we decompose infla- tion into trend and cyclical components and generate theory-implied predic- tions for both, which are recombined to obtain an overall inflation forecast. We find that our forecasting procedure outperforms in predictive accuracy the conventional random walk benchmark at all horizons considered (up to 20 quarters). Moreover, it also outperforms quantitatively the agnos- tic Atkeson-Ohanian (2001) benchmark that previous studies have found dificult to beat.

Suggested Citation

  • Stephen McKnight & Alexander Mihailov & Fabio Rumler, 2018. "NKPC-Based Inflation Forecasts with a Time-Varying Trend," Serie documentos de trabajo del Centro de Estudios Económicos 2018-05, El Colegio de México, Centro de Estudios Económicos.
  • Handle: RePEc:emx:ceedoc:2018-05
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    3. Franz Xaver Zobl & Martin Ertl, 2021. "The Condemned Live Longer – New Evidence of the New Keynesian Phillips Curve in Central and Eastern Europe," Open Economies Review, Springer, vol. 32(4), pages 671-699, September.
    4. Tretyakov, Dmitriy & Fokin, Nikita, 2020. "Помогают Ли Высокочастотные Данные В Прогнозировании Российской Инфляции? [Does the high-frequency data is helpful for forecasting Russian inflation?]," MPRA Paper 109556, University Library of Munich, Germany.
    5. Bonam, Dennis & de Haan, Jakob & van Limbergen, Duncan, 2021. "Time-varying wage Phillips curves in the euro area with a new measure for labor market slack," Economic Modelling, Elsevier, vol. 96(C), pages 157-171.

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    More about this item

    Keywords

    time-varying trend; generalized New Keynesian Phillips Curve; inflation dynamics; inflation forecasts; predictive accuracy;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • 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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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