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Improving inflation prediction with the quantity theory

Ying Wang, Yundong Tu and Song Chen

Economics Letters, 2016, vol. 149, issue C, 112-115

Abstract: This paper focuses on the role of the quantity theory in improving inflation forecasts. We find that the cointegration-based quantity theory does not hold for the period after 1995 for the U.S. data. However, that period is well explained by an adaptive quantity theory based on a functional-coefficient cointegration that adapts to the unemployment rate. The forecasting exercises show that the adaptive quantity theory has superior predictive power for targeting future inflation.

Keywords: Cointegrations; Inflation forecasting; Quantity theory of money; Phillips Curve (search for similar items in EconPapers)
JEL-codes: E31 C32 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.econlet.2016.10.023

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