Inflation and Professional Forecast Dynamics: An Evaluation of Stickiness, Persistence, and Volatility

70 Pages Posted: 27 Sep 2017

See all articles by Elmar Mertens

Elmar Mertens

Deutsche Bundesbank

James M. Nason

North Carolina State University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: September 12, 2017

Abstract

This paper studies the joint dynamics of real time U.S. inflation and the mean inflation predictions of the Survey of Professional Forecasters (SPF) on a 1968Q4 to 2017Q2 sample. The joint data generating process (DGP) is an unobserved components (UC) model of inflation and a sticky information (SI) prediction mechanism for SPF inflation predictions. We add drifting gap inflation persistence to a UC model that already has stochastic volatility (SV) afflicting trend and gap inflation. Another innovation puts a time-varying frequency of inflation forecast updating into the SI-prediction mechanism. The joint DGP is a nonlinear state space model (SSM). We estimate the SSM using Bayesian tools grounded in a Rao-Blackwellized auxiliary particle filter, particle learning, and a particle smoother. The estimates show (i) longer horizon average SPF inflation predictions inform estimates of trend inflation, (ii) gap inflation persistence is pro-cyclical, and SI inflation updating is frequent before the Volcker disinflation, and (iii) subsequently, trend inflation and its SV fall, gap inflation persistence turns counter-cyclical, and SI inflation updating becomes infrequent.

Keywords: Inflation, Unobserved Components, Professional Forecasts, Sticky Information, Stochastic Volatility, Time-Varying Parameters, Bayesian, Particle Filter

JEL Classification: E31, C11, C32

Suggested Citation

Mertens, Elmar and Nason, James M., Inflation and Professional Forecast Dynamics: An Evaluation of Stickiness, Persistence, and Volatility (September 12, 2017). CAMA Working Paper No. 60/2017, Available at SSRN: https://ssrn.com/abstract=3042952 or http://dx.doi.org/10.2139/ssrn.3042952

Elmar Mertens

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

James M. Nason (Contact Author)

North Carolina State University - Department of Economics ( email )

Campus Box 8110
NC State University
Raleigh, NC 27695-8110
United States
(919) 513-2884 (Phone)
(919) 515-5613 (Fax)

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