Title: Inflation Dynamics and the Hybrid New Keynesian Phillips Curve: The Case of Chile
Abstract: It is recognized that the understanding and accurate forecasts of key macroeconomic variables are fundamental for the success of any eco¬nomic policy. In the case of monetary policy, many efforts have been made toward understanding the relation between past and expected values of inflation, resulting in the so-called hybrid New Keynesian Phillips curve (HNKPC). In this article I investigate to which extent the HNKPC help to explain inflation dynamics as well as its out-of- sam¬ple forecast for the case of the Chilean economy. The results show that the forward-looking component is significant and accounts from 1.58 to 0.40 times the lagged inflation coefficient. Also, I find predictive gains close to 45% (respect to a backward-looking specification) and up to 80% (respect to the random walk) when forecasting at 12-months ahead. The output gap building process plays a key role delivering better results than similar benchmark. None of the two openness measures used –real exchange rate nor oil price– are significant in the reduced form. A final estimation using the annual variation of a monthly in¬dicator of GDP deliver reasonable forecast accuracy but not as good as the preferred forecast-implied output gap measure.
Publication Year: 2015
Publication Date: 2015-01-01
Language: en
Type: article
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Cited By Count: 2
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