A Neural Phillips Curve and a Deep Output Gap

57 Pages Posted: 23 Mar 2022

See all articles by Philippe Goulet Coulombe

Philippe Goulet Coulombe

Université du Québec à Montréal - Département des Sciences Économiques

Date Written: January 26, 2022


Many problems plague the estimation of Phillips curves. Among them is the hurdle that the two key components, inflation expectations and the output gap, are both unobserved. Traditional remedies include creating reasonable proxies for the notable absentees or extracting them via some form of assumptions-heavy filtering procedure. I propose an alternative route: a Hemisphere Neural Network (HNN) whose peculiar architecture yields a final layer where components can be interpreted as latent states within a Neural Phillips Curve. There are benefits. First, HNN conducts the supervised estimation of nonlinearities that arise when translating a high-dimensional set of observed regressors into latent states. Second, computations are fast. Third, forecasts are economically interpretable. Fourth, inflation volatility can also be predicted by merely adding a hemisphere to the model. Among other findings, the contribution of real activity to inflation appears severely underestimated in traditional econometric specifications. Also, HNN captures out-of-sample the 2021 upswing in inflation and attributes it first to an abrupt and sizable disanchoring of the expectations component, followed by a wildly positive gap starting from late 2020. HNN’s gap unique path comes from dispensing with unemployment and GDP in favor of an amalgam of nonlinearly processed alternative tightness indicators – some of which are skyrocketing as of early 2022.

Keywords: machine learning, inflation, neural networks, output gap, filtering

Suggested Citation

Goulet Coulombe, Philippe, A Neural Phillips Curve and a Deep Output Gap (January 26, 2022). Available at SSRN: https://ssrn.com/abstract=4018079 or http://dx.doi.org/10.2139/ssrn.4018079

Philippe Goulet Coulombe (Contact Author)

Université du Québec à Montréal - Département des Sciences Économiques ( email )

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Succursale Centre Ville
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