Has U.S. Inflation Really Become Harder to Forecast?

Lanne, Markku and Luoto, Jani (2010): Has U.S. Inflation Really Become Harder to Forecast?

Abstract

Recently Stock and Watson (2007) showed that since the mid-1980s it has been hard for backward-looking Phillips curve models to improve on simple univariate models in forecasting U.S. inflation. While this indeed is the case when the benchmark is a causal autoregression, little change in forecast accuracy is detected when a noncausal autoregression is taken as the benchmark. In this note, we argue that a noncausal autoregression indeed provides a better characterization of U.S. inflation dynamics than the conventional causal autoregression and it is, therefore, the appropriate univariate benchmark model.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation forecast; Noncausal time series; Phillips curve
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models

References

Atkeson, Andrew, and Lee E. Ohanian (2001). Are Phillips Curves Useful for Forecasting Inflation? Federal Reserve Bank of Minneapolis Quarterly Review, 25:1, 2-11.

Lanne, M., and P. Saikkonen (2008). Modeling Expectations with Noncausal Autoregressions. HECER Discussion Paper 212.

Lanne, M., A. Luoma, and J. Luoto (2009). Bayesian Model Selection and Forecasting in Noncausal Autoregressive Models. Journal of Applied Econometrics (forthcoming).

Lanne, M., J. Luoto, and P. Saikkonen (2010). Optimal Forecasting of Noncausal Autoregressive Time Series. HECER Discussion Paper 286.

Stock, James H., and Mark W. Watson (2007) Why Has U.S. Inflation Become Harder to Forecast? Journal of Money, Credit and Banking, Supplement to Vol. 39, 3-33.