Do Phillips Curves Conditionally Help to Forecast Inflation?

38 Pages Posted: 2 Apr 2015

See all articles by Michael Dotsey

Michael Dotsey

Federal Reserve Bank of Philadelphia

Shigeru Fujita

Federal Reserve Bank of Philadelphia

Tom Stark

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 3 versions of this paper

Date Written: March 2015

Abstract

This paper reexamines the forecasting ability of Phillips curves from both an unconditional and conditional perspective by applying the method developed by Giacomini and White (2006). We find that forecasts from our Phillips curve models tend to be unconditionally inferior to those from our univariate forecasting models. We also find, however, that conditioning on the state of the economy sometimes does improve the performance of the Phillips curve model in a statistically significant manner. When we do find improvement, it is asymmetric -- Phillips curve forecasts tend to be more accurate when the economy is weak and less accurate when the economy is strong. Any improvement we find, however, vanished over the post-1984 period.

Keywords: Phillips curve, unemployment gap, conditional predictive ability

JEL Classification: C53, E37

Suggested Citation

Dotsey, Michael and Fujita, Shigeru and Stark, Tom, Do Phillips Curves Conditionally Help to Forecast Inflation? (March 2015). FRB of Philadelphia Working Paper No. 15-16, Available at SSRN: https://ssrn.com/abstract=2587973 or http://dx.doi.org/10.2139/ssrn.2587973

Michael Dotsey (Contact Author)

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Shigeru Fujita

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Tom Stark

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Research Department
Philadelphia, PA 19106-1574
United States
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