The Real-time Forecasting Performance of Phillips Curves
Analysts typically use a variety of techniques to forecast inflation. These include both ‘bottom-up’ approaches, for near-term forecasting, as well as econometric methods (such as mark-up models of inflation, which have been found to perform quite well for Australia – see de Brouwer and Ericsson (1998)). One of the econometric approaches to inflation forecasting which is sometimes considered is the use of Phillips curves based on estimates of the output gap. This paper suggests, however, that the real-time capacity of such Phillips curves to forecast inflation is limited, relative even to such simple benchmark forecasting approaches as an autoregressive (AR) model of inflation or a random walk assumption. It appears that the lack of precision with which output-gap-based Phillips curves can be estimated in real time limits their usefulness as a means of forecasting inflation in isolation. Phillips curve-based forecasts may, however, perform a little better than AR model-based ones in at least predicting whether inflation will increase or decrease from its current level. Moreover, combining Phillips curve-based forecasts with those from simple, alternative approaches does seem to offer some scope for improving the real-time forecast accuracy of the latter. These observations suggest that, in spite of their generally disappointing performance as a means of forecasting inflation in isolation, output-gap-based Phillips curves may continue to be useful in real time – as a tool for conditioning gap estimates within a multivariate filtering framework, and as a possible complement to other, alternative inflation forecasting approaches.
|Date of creation:||Dec 2003|
|Date of revision:|
|Contact details of provider:|| Postal: GPO Box 3947, Sydney NSW 2001|
Web page: http://www.rba.gov.au/
More information through EDIRC
|Order Information:||Web: http://www.rba.gov.au/forms/rdp-order-form/|
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.:
- Holden, K & Peel, D A, 1990. "On Testing for Unbiasedness and Efficiency of Forecasts," The Manchester School of Economic & Social Studies, University of Manchester, vol. 58(2), pages 120-27, June.
- David Gruen & Tim Robinson & Andrew Stone, 2002. "Output Gaps in Real Time: Are They Reliable Enough to Use for Monetary Policy?," RBA Research Discussion Papers rdp2002-06, Reserve Bank of Australia.
- Gruen, David & Pagan, Adrian & Thompson, Christopher, 1999.
"The Phillips curve in Australia,"
Journal of Monetary Economics,
Elsevier, vol. 44(2), pages 223-258, October.
- West, Kenneth D., 2001.
"Encompassing tests when no model is encompassing,"
Journal of Econometrics,
Elsevier, vol. 105(1), pages 287-308, November.
- Athanasios Orphanides & Simon Van_Norden, 2000.
"The Reliability of Output Gap Estimates in Real Time,"
Econometric Society World Congress 2000 Contributed Papers
0768, Econometric Society.
- Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
- 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.).
- Athanasios Orphanides & Simon van Norden, 2001. "The Unreliability of Output Gap Estimates in Real Time," CIRANO Working Papers 2001s-57, CIRANO.
- Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA.
- Nelson, Edward & Nikolov, Kalin, 2003.
"UK inflation in the 1970s and 1980s: the role of output gap mismeasurement,"
Journal of Economics and Business,
Elsevier, vol. 55(4), pages 353-370.
- Nelson, Edward & Nikolov, Kalin, 2001. "UK Inflation in the 1970s and 1980s: The Role of Output Gap Mismeasurement," CEPR Discussion Papers 2999, C.E.P.R. Discussion Papers.
- Edward Nelson & Kalin Nikolov, 2001. "UK inflation in the 1970s and 1980s: the role of output gap mismeasurement," Bank of England working papers 148, Bank of England.
- Christopher A. Sims, 2002. "The Role of Models and Probabilities in the Monetary Policy Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 1-62.
- Meredith Beechey & Nargis Bharucha & Adam Cagliarini & David Gruen & Christopher Thompson, 2000. "A Small Model of the Australian Macroeconomy," RBA Research Discussion Papers rdp2000-05, Reserve Bank of Australia.
- Andrew Stone & Sharon Wardrop, 2002. "Real-time National Accounts Data," RBA Research Discussion Papers rdp2002-05, Reserve Bank of Australia.
- Yock Y. Chong & David F. Hendry, 1986. "Econometric Evaluation of Linear Macro-Economic Models," Review of Economic Studies, Oxford University Press, vol. 53(4), pages 671-690.
When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp2003-12. 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: (Paula Drew)
If references are entirely missing, you can add them using this form.