Forecasting Inflation with the Hybrid New Keynesian Phillips Curve: A Compact-Scale Global VAR Approach

Carlos A. Medel ()

International Economic Journal, 2018, vol. 32, issue 3, 331-371

Abstract: In this article, the multihorizon predictive power of the Hybrid New Keynesian Phillips Curve (HNKPC) is analysed by making use of several close- and open-economy specifications for the headline inflation of six developed countries. The key element is the use of direct measures of inflation expectations – Consensus Forecast – embedded in a compact-scale Global VAR (GVAR) environment, becoming the baseline open-economy HNKPC (OE-HNKPC) specification. These OE-HNKPC point forecasts are evaluated using the Root Mean Squared Forecast Error (RMSFE) statistic and statistically compared with several benchmarks, including traditional atheoretical models. Several OE-HNKPC as well as a closed-economy HNKPC (CE-HNKPC) specifications are also analysed. The results indicate that in four out of six countries, the CE-HNKPC is the best forecasting model, whereas for the same countries, a parsimonious OE-HNKPC is the second-best alternative, and in most cases, outperforming traditional statistical benchmarks. The RMSFE is obviously affected by the unanticipated effects of the Great Financial Crisis (GFC), spoiling out the performance of a number of competing forecasts. However, when considering an evaluation sample just before the crisis, both the CE-HNKPC and the parsimonious OE-HNKPC still come out as the best forecasting models. Furthermore, these preferred models also do an excellent job tracking inflation better than the best atheoretical models during the GFC.

Date: 2018
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Related works:
Working Paper: Forecasting Inflation with the Hybrid New Keynesian Phillips Curve: A Compact-Scale Global VAR Approach (2016)
Working Paper: Forecasting Inflation with the Hybrid New Keynesian Phillips Curve: A Compact-Scale Global VAR Approach (2015)
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DOI: 10.1080/10168737.2018.1501589

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