A State-Dependent Model for Inflation Forecasting

James H. Stock

23 citations0/0 files storedInternational Finance Discussion Paper

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Monetary Policy and Economic Impact Forecasting Techniques and Applications Unemployment and Economic Growth

Abstract

We develop a parsimonious bivariate model of inflation and unemployment that allows for persistent variation in trend inflation and the NAIRU. The model, which consists of five unobserved components (including the trends) with stochastic volatility, implies a time-varying VAR for changes in the rates of inflation and unemployment. The implied backwards-looking Phillips curve has a time-varying slope that is steeper in the 1970s than in the 1990s. Pseudo out-of-sample forecasting experiments indicate improvements upon univariate benchmarks. Since 2008, the implied Phillips curve has become steeper and the NAIRU has increased.

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References

2005Drifts and volatilities: monetary policies and outcomes in the post WWII US 2007Why Has U.S. Inflation Become Harder to Forecast?2001Evolving Post-World War II U.S. Inflation Dynamics 2001Are Phillips Curves Useful for Forecasting Inflation?2008Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve 2009Inflation-Gap Persistence in the US 1996How Precise are Estimates of the Natural Rate of Unemployment?2011Inflation Dynamics and the Great Recession

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2019Is the slope of the Phillips curve time-varying? Evidence from unobserved components models

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