Does a factor Phillips curve help? An evaluation of the predictive power for U.S. inflation |
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Authors: | Dandan Liu Dennis W. Jansen |
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Affiliation: | (1) Department of Economics, College of Business Administration, Kent State University, P.O. Box 5190, Kent, OH 44242, USA;(2) Department of Economics, 4228 TAMU, Texas A & M University, College Station, TX 77843, USA |
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Abstract: | This article evaluates various models’ predictive power for U.S. inflation rate using a simulated out-of-sample forecasting framework. The starting point is the traditional unemployment Phillips curve. We show that a factor Phillips curve model is superior to the traditional Phillips curve, and its performance is comparable to other factor models. We find that a factor AR model is superior to the factor Phillips curve model, and is the best bivariate or factor model at longer horizons. Finally, we investigate a New Keynesian Phillips curve model, and find that its forecasting performance dominates all other models at the longer horizons. |
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