Forecasting Inflation with the New Keynesian Phillips Curve: Frequency Matters

Manuel Martins and Fabio Verona

CEF.UP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: We show that the New Keynesian Phillips Curve (NKPC) outperforms standard benchmarks in forecasting U.S. inflation once frequency-domain information is taken into account. We do so by decomposing the time series (of inflation and its predictors) into several frequency bands and forecasting separately each frequency component of inflation. The largest statistically significant forecasting gains are achieved with a model that forecasts the lowest frequency component of inflation (corresponding to cycles longer than 16 years) flexibly using information from all frequency components of the NKPC inflation predictors. Its performance is particularly good in the returning to recovery from the Great Recession.

Keywords: Inflation forecasting; New Keynesian Phillips curve; Frequency domain; Wavelets (search for similar items in EconPapers)
JEL-codes: C53 E31 E37 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2020-04
New Economics Papers: this item is included in nep-for, nep-mac, nep-mon and nep-ore
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Working Paper: Forecasting inflation with the New Keynesian Phillips curve: Frequency matters (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:por:cetedp:2001

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