Fundamental Inflation Uncertainty

23 Pages Posted: 27 Feb 2007

See all articles by Charlotta Groth

Charlotta Groth

Bank of England - Monetary Analysis

Jarkko P. Jääskelä

Reserve Bank of Australia

Paolo Surico

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: October 2006

Abstract

We develop a method of quantifying the uncertainty surrounding the estimates of the fundamental inflation implied by the New Keynesian Phillips Curve (NKPC). The uncertainty is represented as a band around the fundamental inflation, and encompasses the sampling uncertainty of both the estimates of the structural parameters and the estimates of the VAR used to form a projection of real marginal costs. An empirical application on UK and US data confirms that fundamental inflation tracks actual inflation reasonably well in both countries. For the United Kingdom the confidence band is sufficiently narrow, relative to the sample variance of inflation, to identify a number of periods where the predictions of the NKPC do not fully capture movements in actual inflation. In contrast, considerable uncertainty surrounds the estimates of fundamental inflation for the United States.

Keywords: Sampling uncertainty, New Keynesian Phillips Curve, fundamental inflation, two-step minimum distance

JEL Classification: E38, E52

Suggested Citation

Groth, Charlotta and Jääskelä, Jarkko P. P. and Surico, Paolo, Fundamental Inflation Uncertainty (October 2006). Bank of England Working Paper No. 309. Available at SSRN: https://ssrn.com/abstract=965444 or http://dx.doi.org/10.2139/ssrn.965444

Charlotta Groth (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Jarkko P. P. Jääskelä

Reserve Bank of Australia ( email )

Paolo Surico

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

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