Inflation Dynamics and Forecast: Frequency Matters

49 Pages Posted: 9 Jun 2021 Last revised: 16 Jun 2021

See all articles by Manuel M. F. Martins

Manuel M. F. Martins

University of Porto, cef.up, Faculdade de Economia

Fabio Verona

Bank of Finland - Research

Date Written: June 8, 2021

Abstract

Policymakers and researchers see inflation characterized by cyclical fluctuations driven by changes in resource utilization and temporary shocks, around a trend influenced by inflation expectations. We study the in-sample inflation dynamics and forecast inflation out-of-sample by analyzing a New Keynesian Phillips Curve (NKPC) in the frequency domain. In-sample, while inflation expectations dominate medium-to-long-run cycles, energy prices dominate short cycles and business-to-medium cycles once expectations became anchored. While statistically significant, unemployment is not economically relevant for any cycle. Out-of-sample, forecasts from a low-frequency NKPC significantly outperform several benchmark models. The long-run component of unemployment is key for such remarkable forecasting performance.

JEL Classification: C53, E31, E37

Suggested Citation

Mota Freitas Martins, Manuel and Verona, Fabio, Inflation Dynamics and Forecast: Frequency Matters (June 8, 2021). Bank of Finland Research Discussion Paper No. 8/2021, Available at SSRN: https://ssrn.com/abstract=3863066

Manuel Mota Freitas Martins (Contact Author)

University of Porto, cef.up, Faculdade de Economia ( email )

4200-464 Porto
Portugal

Fabio Verona

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

HOME PAGE: http://bofcris.solenovo.fi/crisyp/disp/_/en/cr_redir_all/fet/fet/sea?direction=3&id=3827426

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