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Econometric Analysis of Switching Expectations in UK Inflation

Adriana Cornea‐Madeira and Joao Madeira
Authors registered in the RePEc Author Service: Adriana Cornea-Madeira

Oxford Bulletin of Economics and Statistics, 2022, vol. 84, issue 3, 651-673

Abstract: We estimate with UK data a Phillips curve model with backward‐looking and forward‐looking methods of determining inflation expectations and with agents switching between these based on their recent performance. We find that, while on average backward‐looking and forward‐looking methods have about equal weight, there are considerable movements in the weight given to each method. We show this model has better in‐sample fit than other Phillips curve models and this is robust to the methodology chosen. The model out‐of‐sample forecasts on certain dates do better than other Phillips curve models and the Atkeson and Ohanian model.

Date: 2022
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