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The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time (2003)
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| Citations: | 53 - 6 self |
BibTeX
@MISC{Orphanides03thereliability,
author = {Athanasios Orphanides and Simon van Norden},
title = {The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time},
year = {2003}
}
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Abstract
A stable predictive relationship between inflation and the output gap, often referred to as a Phillips curve, provides the basis for countercyclical monetary policy in many models. In this paper, we evaluate the usefulness of alternative univariate and multivariate estimates of the output gap for predicting inflation. Many of the ex post output gap measures we examine appear to be quite useful for predicting inflation. However, forecasts using realtime estimates of the same measures do not perform nearly as well. The relative usefulness of real-time output gap estimates diminishes further when compared to simple bivariate forecasting models which use past inflation and output growth. Forecast performance also appears to be unstable over time, with models often performing di#erently over periods of high and low inflation. These results call into question the practical usefulness of the output gap concept for forecasting inflation.
Keyphrases
output gap estimate real time inflation forecast output gap ex post output gap countercyclical monetary policy bivariate forecasting model forecast performance alternative univariate phillips curve past inflation real-time output gap relative usefulness output growth low inflation stable predictive relationship many model multivariate estimate output gap concept realtime estimate practical usefulness
