Inference and Forecasting Based on the Phillips Curve
KDI Journal of Economic Policy 2016, 38(2) 1-20
21 Pages Posted: 27 Jun 2016
Date Written: May 31, 2016
Abstract
In this paper, we conduct uniform inference of two widely used versions of the Phillips curve, specifically the random-walk Phillips curve and the New-Keynesian Phillips curve (NKPC). For both specifications, we propose a potentially time-varying natural unemployment (NAIRU) to address the uncertainty surrounding the inflation-unemployment trade-off. The inference is conducted through the construction of what is known as the uniform confidence band (UCB). The proposed methodology is then applied to point-ahead inflation forecasting for the Korean economy. This paper finds that the forecasts can benefit from conducting UCB-based inference and that the inference results have important policy implications.
Keywords: Time-varying NAIRU, Random-walk Phillips curve, New-Keynesian Phillips curve, Uniform confidence band, Model validation, Inflation forecasting
JEL Classification: C12, C13, C14
Suggested Citation: Suggested Citation