The Forecasting Performance of Single Equation Models of Inflation

In the US academic literature, it is now widely accepted that it is difficult to generate a more accurate forecast of inflation than a simple autoregressive model, following Atkeson and Ohanian's seminal work. In central banks, however, the conventional view that inflation is ultimately determi...

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Bibliographic Details
Published in:The Economic record 2012-03, Vol.88 (280), p.64-78
Main Authors: NORMAN, DAVID, RICHARDS, ANTHONY
Format: Article
Language:English
Subjects:
C53
Consumer Price Index
E31
Econometric models
Economic forecasting
Exchange rates
Forecasts
Inflation
Monetary economics
Phillips curve
Regression analysis
Studies
U.S.A
Vector-autoregressive models
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Summary:In the US academic literature, it is now widely accepted that it is difficult to generate a more accurate forecast of inflation than a simple autoregressive model, following Atkeson and Ohanian's seminal work. In central banks, however, the conventional view that inflation is ultimately determined by excess demand in the economy is still widely accepted, and research into activity‐based models has continued. We add to this research by examining a range of activity‐based models, with the aim being to determine whether any of these can outperform the autoregressive benchmark, and if so, which performs best. Our results show that an expectations‐augmented, unemployment‐based Phillips Curve can produce significantly superior forecasts of Australian trimmed mean inflation to both the autoregressive benchmark and others at a range of forecast horizons, while mark‐up type models also produce superior results at longer horizons. This outperformance is shown to come from the period in which inflation rose to relatively high rates. These results do not, however, translate to headline consumer price index inflation, suggesting that inflation in the items that are ‘trimmed’ largely reflects ‘noise’, as opposed to any signal of trend inflation.
ISSN:0013-0249
1475-4932
DOI:10.1111/j.1475-4932.2011.00781.x