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Do Phillips Curves Conditionally Help to Forecast Inflation?

Author

Listed:
  • Dotsey, Michael

    (Federal Reserve Bank of Philadelphia)

  • Fujita, Shigeru

    (Federal Reserve Bank of Philadelphia)

  • Stark, Tom

    (Federal Reserve Bank of Philadelphia)

Abstract

This paper reexamines the forecasting ability of Phillips curves from both an unconditional and conditional perspective by applying the method developed by Giacomini and White (2006). We find that forecasts from our Phillips curve models tend to be unconditionally inferior to those from our univariate forecasting models. Significantly, we also find conditional inferiority, with some exceptions. When we do find improvement, it is asymmetric - Phillips curve forecasts tend to be more accurate when the economy is weak and less accurate when the economy is strong. Any improvement we find, however, vanished over the post-1984 period.

Suggested Citation

  • Dotsey, Michael & Fujita, Shigeru & Stark, Tom, 2017. "Do Phillips Curves Conditionally Help to Forecast Inflation?," Working Papers 17-26, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:17-26
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    References listed on IDEAS

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    1. Orphanides, Athanasios & van Norden, Simon, 2005. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 583-601, June.
    2. James H. Stock & Mark W. Watson, 2008. "Phillips curve inflation forecasts," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 53.
    3. Rachidi Kotchoni & Dalibor Stevanovic, 2016. "Forecasting U.S. Recessions and Economic Activity," EconomiX Working Papers 2016-40, University of Paris Nanterre, EconomiX.
    4. Clark, Todd & McCracken, Michael, 2013. "Advances in Forecast Evaluation," Handbook of Economic Forecasting, Elsevier.
    5. Ang, Andrew & Bekaert, Geert & Wei, Min, 2007. "Do macro variables, asset markets, or surveys forecast inflation better?," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1163-1212, May.
    6. 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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    8. Michael Dotsey & Tom Stark, 2005. "The relationship between capacity utilization and inflation," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 8-17.
    9. Kiley, Michael T., 2015. "An evaluation of the inflationary pressure associated with short- and long-term unemployment," Economics Letters, Elsevier, vol. 137(C), pages 5-9.
    10. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
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    Citations

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    Cited by:

    1. Joshua C. C. Chan & Gary Koop & Simon M. Potter, 2016. "A Bounded Model of Time Variation in Trend Inflation, Nairu and the Phillips Curve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(3), pages 551-565, April.
    2. Andrea Stella & James H. Stock, 2012. "A state-dependent model for inflation forecasting," International Finance Discussion Papers 1062, Board of Governors of the Federal Reserve System (U.S.).
    3. Michael McLeay & Silvana Tenreyro, 2018. "Optimal Inflation and the Identification of the Phillips Curve," Discussion Papers 1815, Centre for Macroeconomics (CFM).
    4. Pierre L Siklos, 2013. "Forecast disagreement and the anchoring of inflation expectations in the Asia-Pacific Region," BIS Papers chapters,in: Bank for International Settlements (ed.), Globalisation and inflation dynamics in Asia and the Pacific, volume 70, pages 25-40 Bank for International Settlements.
    5. Todd E. Clark & Taeyoung Doh, 2011. "A Bayesian evaluation of alternative models of trend inflation," Research Working Paper RWP 11-16, Federal Reserve Bank of Kansas City.
    6. Faust, Jon & Wright, Jonathan H., 2013. "Forecasting Inflation," Handbook of Economic Forecasting, Elsevier.
    7. In Choi & Seong Jin Hwang, 2012. "Forecasting Korean inflation," Working Papers 1202, Research Institute for Market Economy, Sogang University.
    8. Taeyoung Doh, 2011. "Is unemployment helpful in understanding inflation?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-26.

    More about this item

    Keywords

    Phillips curve; unemployment gap; conditional predictive ability;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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