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The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time

Athanasios Orphanides () and Simon van Norden ()

CIRANO Working Papers from CIRANO

Abstract: A stable predictive relationship between inflation and the output gap, often referred to as a Phillips curve, provides the basis for empirical formulations of countercyclical monetary policy in many models. In this paper, we provide an empirical evaluation of the usefulness of alternative univariate and multivariate estimates of the output gap for predicting inflation. In-sample analysis based on ex post output gap measures suggests that many of the alternative estimates we examine appear to be quite useful for predicting inflation. However, examination of out-of-sample forecasts using real-time estimates of the same measures suggests that this predictive ability is mostly illusory. We find that the usefulness of output gaps as predictors of inflation has been severely overstated and that real-time forecasts using the output gap are often less accurate than forecasts that abstract from the output gap concept altogether. Dans ce papier, on jauge l'utilité de plusieurs estimations (univariées autant que multivariées) de l'écart de production pour prévoir le taux d'inflation. Une analyse ex post suggère que plusieurs de ces estimations aident à prédire l'inflation. Néanmoins, les erreurs de prédictions hors de l'enchantillon qui se sont construites avec les écarts de production estimés en temps réel indiquent que cette amélioration de prédiction est illusoire. On trouve que l'utilité des écarts de production pour prédire l'inflation a été exagérée et que les prédictions faites avec l'écart de production sont souvent moins précises que celles qui ignorent le concept d'un écart de production.

Keywords: Phillips curve; output gap; inflation forecasts; real-time data; La courbe de Phillips; l'écart de production; des prévisions d'inflation; des données en temps réel (search for similar items in EconPapers)
JEL-codes: E37 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2003-01-01
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Journal Article: The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time (2005)
Working Paper: The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time (2005) Downloads
Working Paper: The reliability of inflation forecasts based on output gap estimates in real time (2004) Downloads
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Handle: RePEc:cir:cirwor:2003s-01