Forecasting inflation with the New Keynesian Phillips curve : Frequency matters

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Title: Forecasting inflation with the New Keynesian Phillips curve : Frequency matters
Author: Martins, Manuel M. F. ; Verona, Fabio
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 4/2020
Year of publication: 2020
Publication date: 21.4.2020
Pages: 36
Subject (yso): inflaatio; ennusteet; aikasarjat
Keywords: Phillipsin käyrä; NKPC; Yhdysvallat; mallit
JEL: C53; E31; E37
Other keywords: inflation forecasting; new Keynesian Phillips curve; frequency domain; wavelets
Abstract: We show that the New Keynesian Phillips Curve (NKPC) outperforms standard benchmarks in forecasting U.S. inflation once frequency-domain information is taken into account. We do so by decomposing the time series (of inflation and its predictors) into several frequency bands and forecasting separately each frequency component of inflation. The largest statistically significant forecasting gains are achieved with a model that forecasts the lowest frequency component of inflation (corresponding to cycles longer than 16 years) flexibly using information from all frequency components of the NKPC inflation predictors. Its performance is particularly good in the returning to recovery from the Great Recession.
Rights: https://helda.helsinki.fi/bof/copyright


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