Alternative Indicators for Predicting the Probability of Declining Inflation

Posted: 24 Jan 2002 Last revised: 20 Oct 2007

See all articles by Sungjun Kang

Sungjun Kang

Korea Ministry of Planning and Budget

Kwangwoo Park

KAIST (Korea Advanced Institute of Science and Technology) - College of Business

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance

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Abstract

Performance of inflation indicators for predicting the probability of inflation falling inside constant and moving targets is considered with a probit model using U.S. data. Given Fed emphasis on achieving price stability, particular attention is given to the target that future inflation will be below recent inflation. In contrast with earlier years, the unemployment and capacity utilization rates do not perform well at forecasting the direction of inflation in the mid and late 1990s. We suggest that extending Keynesian Phillips curve analysis to consider changes in labor market conditions, technological advance and worker skills, and openness will increase understanding of these issues.

Keywords: Probit model, out-of-sample forecast, inflation targets, inflation indicators

JEL Classification: C25, E31, E37, G18

Suggested Citation

Kang, Sungjun and Park, Kwangwoo and Ratti, Ronald A., Alternative Indicators for Predicting the Probability of Declining Inflation. Cambridge Journal of Economics, Vol. 28. No. 1, pp. 37-57, 2004. Available at SSRN: https://ssrn.com/abstract=298150

Sungjun Kang

Korea Ministry of Planning and Budget

520-3 Banpo-dong Seocho-Gu
Seoul 137-756
Korea

Kwangwoo Park (Contact Author)

KAIST (Korea Advanced Institute of Science and Technology) - College of Business ( email )

85 Hoegiro
Seoul 02455
Korea, Republic of (South Korea)
82-2-958-3540 (Phone)
82-2-958-3604 (Fax)

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance ( email )

Sydney, NSW 1797
Australia

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