Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7358838 | Journal of Economic Dynamics and Control | 2018 | 46 Pages |
Abstract
We model local inflation dynamics using global inflation and domestic slack motivated by a novel interpretation of the implications of the workhorse open-economy New Keynesian model. We evaluate the performance of inflation forecasts based on the single-equation forecasting specification implied by the model, exploiting the spatial pattern of international linkages underpinning global inflation. We find that incorporating cross-country interactions yields significantly more accurate forecasts of local inflation for a diverse group of 14 advanced countries (including the U.S.) than either a simple autoregressive model or a standard closed-economy Phillips curve-based forecasting model. We argue that modeling the temporal dimension-but not the cross-country spillovers-of inflation does limit a model's explanatory power in-sample and its (pseudo) out-of-sample forecasting performance. Moreover, we also show that global inflation (without domestic slack) often contributes the most to achieve the gains on forecasting accuracy observed during our sample period (1984:Q1-2015:Q1)-this observation, according to theory, is crucially related to the flattening of the Phillips curve during this time period of increased globalization.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
AyÅe KabukçuoÄlu, Enrique MartÃnez-GarcÃa,