Title: What helps forecast U.S. Inflation?- Mind the Gap!
Abstract: In macroeconomic analysis and inflation forecasting, the traditional Phillips curve has been widelyused to exploit the empirical relationship between inflation and domestic economic activity. Atkeson and Ohanian (2001), among others, cast doubt on the performance of Phillips curve-based forecasts of U.S. inflation relative to naive forecasts. This indicates a difficulty for policy-making and private sector’s longterm nominal commitments which depend on inflation expectations. The literature suggests globalization may be one reason for this phenomenon. To test this, we evaluate the forecasting ability of global slack measures under an open economy Phillips curve. The results are very sensitive to measures of inflation, forecast horizons and estimation samples. We find however, terms of trade gap, measured as HP-filtered terms of trade, is a good and robust variable to forecast U.S. inflation. Moreover, our forecasts based on the simulated data from a workhorse new open economy macro (NOEM) model indicate that better monetary policy and good luck (i.e. a remarkably benign sample of economic shocks) can account for the empirical observations on forecasting accuracy, while globalization plays a secondary role.
Publication Year: 2013
Publication Date: 2013-01-01
Language: en
Type: preprint
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Cited By Count: 4
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