Overcoming the Forecast Combination Puzzle: Lessons from the Time-Varying Effciency of Phillips Curve Forecasts of U.S. Inflation

Christopher Gibbs

No 2015-09, Discussion Papers from School of Economics, The University of New South Wales

Abstract: This paper proposes a new dynamic forecast combination strategy for forecasting inflation. The procedure draws on explanations of why the forecast combination puzzle exists and the stylized fact that Phillips curve forecasts of inflation exhibit significant time-variation in forecast accuracy. The forecast combination puzzle is the empirical observation that a simple average of point forecasts is often the best forecasting strategy. The forecast combination puzzle exists because many dynamic weighting strategies tend to shift weights toward Phillips curve forecasts after they exhibit a significant period of relative forecast improvement, which is often when their forecast accuracy begins to deteriorate. The proposed strategy in this paper weights forecasts according to their expected performance rather than their past performance to anticipate these changes in forecast accuracy. The forward-looking approach is shown to robustly beat equal weights combined and benchmark univariate forecasts of inflation in real-time out-of-sample exercises on U.S. and New Zealand inflation data.

Keywords: Forecast combination; inflation; forecast pooling; forecast combination puzzle; Phillips curve (search for similar items in EconPapers)
JEL-codes: C53 E17 E47 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2015-04
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://research.economics.unsw.edu.au/RePEc/papers/2015-09.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 503 Service Unavailable: Back-end server is at capacity

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:swe:wpaper:2015-09

Access Statistics for this paper

More papers in Discussion Papers from School of Economics, The University of New South Wales Contact information at EDIRC.
Bibliographic data for series maintained by Hongyi Li ().