Posterior-Predictive Evidence on US Inflation using Extended Phillips Curve Models with Non-filtered Data
Changing time series properties of US inflation and economic activity, measured as marginal costs, are modeled within a set of extended Phillips Curve (PC) models. It is shown that mechanical removal or modeling of simple low frequency movements in the data may yield poor predictive results which depend on the model specification used. Basic PC models are extended to include structural time series models that describe typical time varying patterns in levels and volatilities. Forward as well as backward looking expectation mechanisms for inflation are incorporated and their relative importance evaluated. Survey data on expected inflation are introduced to strengthen the information in the likelihood. Use is made of simulation based Bayesian techniques for the empirical analysis. No credible evidence is found on endogeneity and long run stability between inflation and marginal costs. Backward-looking inflation appears stronger than forward-looking one. Levels and volatilities of inflation are estimated more precisely using rich PC models. Estimated inflation expectations track nicely the observed long run inflation from the survey data. The extended PC structures compare favorably with existing basic Bayesian Vector Autoregressive and Stochastic Volatility models in terms of fit and prediction. Tails of the complete predictive distributions indicate an increase in the probability of disinflation in recent years.
|New Keynesian Phillips curve, inflation expectations, level shifts, survey data, time varying parameters, unobserved components|
|Bayesian Analysis (jel C11), Time-Series Models; Dynamic Quantile Regressions (jel C32), Forecasting and Simulation (jel E37)|
|Discussion paper / Tinbergen Institute|
|Organisation||Erasmus School of Economics|
Basturk, N, Cakmakli, C, Ceyhan, S.P, & van Dijk, H.K. (2013). Posterior-Predictive Evidence on US Inflation using Extended Phillips Curve Models with Non-filtered Data. Discussion paper / Tinbergen Institute (pp. 1–68). Tinbergen Institute. Retrieved from http://hdl.handle.net/1765/40586