The Real-time Forecasting Performance of Phillips Curves

Tim Robinson, Andrew Stone and Marileze van Zyl
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Andrew Stone: Reserve Bank of Australia
Marileze van Zyl: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Analysts typically use a variety of techniques to forecast inflation. These include both ‘bottom-up’ approaches, for near-term forecasting, as well as econometric methods (such as mark-up models of inflation, which have been found to perform quite well for Australia – see de Brouwer and Ericsson (1998)). One of the econometric approaches to inflation forecasting which is sometimes considered is the use of Phillips curves based on estimates of the output gap. This paper suggests, however, that the real-time capacity of such Phillips curves to forecast inflation is limited, relative even to such simple benchmark forecasting approaches as an autoregressive (AR) model of inflation or a random walk assumption. It appears that the lack of precision with which output-gap-based Phillips curves can be estimated in real time limits their usefulness as a means of forecasting inflation in isolation. Phillips curve-based forecasts may, however, perform a little better than AR model-based ones in at least predicting whether inflation will increase or decrease from its current level. Moreover, combining Phillips curve-based forecasts with those from simple, alternative approaches does seem to offer some scope for improving the real-time forecast accuracy of the latter. These observations suggest that, in spite of their generally disappointing performance as a means of forecasting inflation in isolation, output-gap-based Phillips curves may continue to be useful in real time – as a tool for conditioning gap estimates within a multivariate filtering framework, and as a possible complement to other, alternative inflation forecasting approaches.

Keywords: monetary policy; forecasting inflation; output gaps; real-time data (search for similar items in EconPapers)
JEL-codes: E32 E37 E52 E60 (search for similar items in EconPapers)
Date: 2003-12
New Economics Papers: this item is included in nep-ets, nep-mac and nep-mon
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Citations: View citations in EconPapers (17)

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