Inflation and professional forecast dynamics: An evaluation of stickiness, persistence, and volatility

Elmar Mertens and James Nason

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper studies the joint dynamics of real time U.S. inflation and the mean inflation predictions of the Survey of Professional Forecasters (SPF) on a 1968Q4 to 2017Q2 sample. The joint data generating process (DGP) is an unobserved components (UC) model of inflation and a sticky information (SI) prediction mechanism for SPF inflation predictions. We add drifting gap inflation persistence to a UC model that already has stochastic volatility (SV) afflicting trend and gap inflation. Another innovation puts a time-varying frequency of inflation forecast updating into the SI-prediction mechanism. The joint DGP is a nonlinear state space model (SSM). We estimate the SSM using Bayesian tools grounded in a Rao-Blackwellized auxiliary particle filter, particle learning, and a particle smoother. The estimates show (i) longer horizon average SPF inflation predictions inform estimates of trend inflation, (ii) gap inflation persistence is pro-cyclical, and SI inflation updating is frequent before the Volcker disinflation, and (iii) subsequently, trend inflation and its SV fall, gap inflation persistence turns counter-cyclical, and SI inflation updating becomes infrequent.

Keywords: Inflation; unobserved components; professional forecasts; sticky information; stochastic volatility; time-varying parameters; Bayesian; particle filter (search for similar items in EconPapers)
JEL-codes: C11 C32 E31 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2017-09
New Economics Papers: this item is included in nep-ets, nep-mac, nep-mon and nep-ore
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Inflation and professional forecast dynamics: An evaluation of stickiness, persistence, and volatility (2020)
Working Paper: Inflation and professional forecast dynamics: an evaluation of stickiness, persistence, and volatility (2018)
Working Paper: Inflation and Professional Forecast Dynamics: An Evaluation of Stickiness, Persistence, and Volatility (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2017-60

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