Inflation Dynamics and Forecast: Frequency Matters

Manuel Martins and Fabio Verona

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

Abstract: Policymakers and researchers see inflation characterized by cyclical fluctuations driven by changes in resource utilization and temporary shocks, around a trend influenced by inflation expectations. We study the in-sample inflation dynamics and forecast inflation out-of-sample by analyzing a New Keynesian Phillips Curve (NKPC) in the frequency domain. In-sample, while inflation expectations dominate medium-to-long-run cycles, energy prices dominate short cycles and business-to-medium cycles once expectations became anchored. While statistically significant, unemployment is not economically relevant for any cycle. Out-of-sample, forecasts from a low-frequency NKPC significantly outperform several benchmark models. The long-run component of unemployment is key for such remarkable forecasting performance.

Keywords: Inflation dynamics; Inflation forecast; 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: 47 pages
Date: 2021-06
New Economics Papers: this item is included in nep-cwa, nep-for, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Inflation dynamics and forecast: Frequency matters (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:por:cetedp:2101

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