Uncertainty over models and data: the rise and fall of American inflation

Seth Pruitt ()

No 962, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: An economic agent who is uncertain of her model updates her beliefs in response to the data. The updating is sensitive to measurement error which, in many cases of macroeconomic interest, is apparent from the process of data revision. I make this point through simple illustrations and then analyze a recent model of the Federal Reserve's role in U.S. inflation. The existing model succeeds at fitting inflation to optimal policy, but fails to link inflation to the economic trade-off at the heart of the story. I modify the model to account for data uncertainty and find that doing so ameliorates the existing problems. This suggests that the Fed's model uncertainty is largely overestimated by ignoring data uncertainty. Consequently, now there is an explanation for the rise and fall in inflation: the concurrent rise and fall in the perceived Philips curve trade-off.

Keywords: Uncertainty; Econometric models; Economic forecasting (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Uncertainty Over Models and Data: The Rise and Fall of American Inflation (2012)
Journal Article: Uncertainty Over Models and Data: The Rise and Fall of American Inflation (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:962

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