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Has U.S. Inflation Really Become Harder to Forecast?

Markku Lanne and Jani Luoto

MPRA Paper from University Library of Munich, Germany

Abstract: Recently Stock and Watson (2007) showed that since the mid-1980s it has been hard for backward-looking Phillips curve models to improve on simple univariate models in forecasting U.S. inflation. While this indeed is the case when the benchmark is a causal autoregression, little change in forecast accuracy is detected when a noncausal autoregression is taken as the benchmark. In this note, we argue that a noncausal autoregression indeed provides a better characterization of U.S. inflation dynamics than the conventional causal autoregression and it is, therefore, the appropriate univariate benchmark model.

Keywords: Inflation forecast; Noncausal time series; Phillips curve (search for similar items in EconPapers)
JEL-codes: C23 C53 E31 (search for similar items in EconPapers)
Date: 2010
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