Inflation Forecasts, Monetary Policy and Unemployment Dynamics: Evidence from the US and the Euro area
This paper explores the role that inflation forecasts play in the uncertainty surrounding the estimated effects of alternative monetary rules on unemployment dynamics in the euro area and the US. We use the inflation forecasts of 8 competing models in a standard Bayesian VAR to analyse the size and the timing of these effects, as well as to quantify the uncertainty relative to the different inflation models under two rules. The results suggest that model uncertainty can be a serious issue and strengthen the case for a policy strategy that takes into account several sources of information. We find that combining inflation forecasts from many models not only yields more accurate forecasts than those of any specific model, but also reduces the uncertainty associated with the real effects of policy decisions. These results are in line with the model-combination approach that central banks already follow when conceiving their strategy.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
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.:
- Zou, Hui & Yang, Yuhong, 2004. "Combining time series models for forecasting," International Journal of Forecasting, Elsevier, vol. 20(1), pages 69-84.
- Eitrheim, Oyvind & Terasvirta, Timo, 1996.
"Testing the adequacy of smooth transition autoregressive models,"
Journal of Econometrics,
Elsevier, vol. 74(1), pages 59-75, September.
- Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," SSE/EFI Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
- Stock, James H. & Watson, Mark W., 2006. "Forecasting with Many Predictors," Handbook of Economic Forecasting, Elsevier.
- Marco Aiolfi & Carlos Capistrán & Allan Timmermann, 2010.
CREATES Research Papers
2010-21, School of Economics and Management, University of Aarhus.
- Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
- Benati, Luca, 2001. "Some empirical evidence on the 'discouraged worker' effect," Economics Letters, Elsevier, vol. 70(3), pages 387-395, March.
- Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
- Yang, Yuhong, 2004. "Combining Forecasting Procedures: Some Theoretical Results," Econometric Theory, Cambridge University Press, vol. 20(01), pages 176-222, February.
- Hendry, David F. & Hubrich, Kirstin, 2006.
"Forecasting economic aggregates by disaggregates,"
Working Paper Series
0589, European Central Bank.
- Julia Darby & Robert A Hart & Michaela Vecchi, 1998. "Labour Force Participation and the Business Cycle: A Comparative Analysis of Europe, Japan and the United States," Working Papers 9802, Business School - Economics, University of Glasgow.
- Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004.
"Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach,"
NBER Working Papers
10220, National Bureau of Economic Research, Inc.
- Ben Bernanke & Jean Boivin & Piotr S. Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 387-422, January.
- Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach," Finance and Economics Discussion Series 2004-03, Board of Governors of the Federal Reserve System (U.S.).
- Min, C.K. & Zellner, A., 1992.
""Bayesian and Non-Bayesian Methods for Combining Models and Forecasts with Applications to Forecasting International Growth Rates","
90-92-23, California Irvine - School of Social Sciences.
- Min, Chung-ki & Zellner, Arnold, 1993. "Bayesian and non-Bayesian methods for combining models and forecasts with applications to forecasting international growth rates," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 89-118, March.
- Matteo Ciccarelli & Alessandro Rebucci, 2003. "BVARs: A Survey of the Recent Literature with an Application to the European Monetary System," Rivista di Politica Economica, SIPI Spa, vol. 93(5), pages 47-112, September.
- Sims, Christopher A & Zha, Tao, 1998.
"Bayesian Methods for Dynamic Multivariate Models,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 949-68, November.
- Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
- Blundell, Richard & Ham, John & Meghir, Costas, 1998. "Unemployment, discouraged workers and female labour supply," Research in Economics, Elsevier, vol. 52(2), pages 103-131, June.
- Francis X. Diebold & Robert S. Mariano, 1994.
"Comparing Predictive Accuracy,"
NBER Technical Working Papers
0169, National Bureau of Economic Research, Inc.
- Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
- Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
- Mark W. Watson & James H. Stock, 2004. "Combination forecasts of output growth in a seven-country data set," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(6), pages 405-430.
- Clark, Kim B & Summers, Lawrence H, 1982.
"Labour Force Participation: Timing and Persistence,"
Review of Economic Studies,
Wiley Blackwell, vol. 49(5), pages 825-44, Special I.
- James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
- Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
- Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583.
- Jones, Barry E. & Stracca, Livio, 2006. "Are money and consumption additively separable in the euro area? A non-parametric approach," Working Paper Series 0704, European Central Bank.
- Yongmiao Hong & Tae-Hwy Lee, 2003. "Inference on Predictability of Foreign Exchange Rates via Generalized Spectrum and Nonlinear Time Series Models," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1048-1062, November.
When requesting a correction, please mention this item's handle: RePEc:red:sed007:315. 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: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.