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NKPC-Based Inflation Forecasts with a Time-Varying Trend

Stephen McKnight (), Alexander Mihailov () and Fabio Rumler ()

Serie documentos de trabajo del Centro de Estudios Económicos from El Colegio de México, Centro de Estudios Económicos

Abstract: Does theory aid inflation forecasting? This paper develops a forecasting procedure based upon a generalized New Keynesian Phillips Curve that in- corporates time-varying trend inflation. Using quarterly data for the Euro Area and the United States over the period 1970-2015, we decompose infla- tion into trend and cyclical components and generate theory-implied predic- tions for both, which are recombined to obtain an overall inflation forecast. We find that our forecasting procedure outperforms in predictive accuracy the conventional random walk benchmark at all horizons considered (up to 20 quarters). Moreover, it also outperforms quantitatively the agnos- tic Atkeson-Ohanian (2001) benchmark that previous studies have found dificult to beat.

Keywords: time-varying trend; generalized New Keynesian Phillips Curve; inflation dynamics; inflation forecasts; predictive accuracy (search for similar items in EconPapers)
JEL-codes: C53 D43 E31 E37 F41 F47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-for and nep-mac
Date: 2018-07
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Persistent link: https://EconPapers.repec.org/RePEc:emx:ceedoc:2018-05

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