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Improving inflation prediction with the quantity theory

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  • Wang, Ying
  • Tu, Yundong
  • Chen, Song Xi

Abstract

This paper focuses on the role of the quantity theory in improving inflation forecasts. We find that the cointegration-based quantity theory does not hold for the period after 1995 for the U.S. data. However, that period is well explained by an adaptive quantity theory based on a functional-coefficient cointegration that adapts to the unemployment rate. The forecasting exercises show that the adaptive quantity theory has superior predictive power for targeting future inflation.

Suggested Citation

  • Wang, Ying & Tu, Yundong & Chen, Song Xi, 2016. "Improving inflation prediction with the quantity theory," Economics Letters, Elsevier, vol. 149(C), pages 112-115.
    • Handle: RePEc:eee:ecolet:v:149:y:2016:i:c:p:112-115
    DOI: 10.1016/j.econlet.2016.10.023
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    Cited by:

    1. Ying Wang & Peter C. B. Phillips & Yundong Tu, 2024. "Limit Theory and Inference in Non-cointegrated Functional Coefficient Regression," Cowles Foundation Discussion Papers 2399, Cowles Foundation for Research in Economics, Yale University.
    2. Kumhof, Michael & Wang, Xuan, 2021. "Banks, money, and the zero lower bound on deposit rates," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    3. repec:ers:journl:v:xxiv:y:2021:i:4:p:1018-1046 is not listed on IDEAS
    4. Bart van Ark & Joel Hoskins & Nina Jörden, 2023. "Public Sector Productivity – managing the Baumol cost disease," Insight Papers 025, The Productivity Institute.
    5. Ying Wang & Peter C. B. Phillips, 2024. "Limit Theory of Local Polynomial Estimation in Functional Coefficient Regression," Cowles Foundation Discussion Papers 2398, Cowles Foundation for Research in Economics, Yale University.
    6. Zhenzhong Wang & Yundong Tu & Song Xi Chen, 2019. "Analyzing China's Consumer Price Index Comparatively with that of United States," Papers 1910.13301, arXiv.org.

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    More about this item

    Keywords

    Cointegrations; Inflation forecasting; Quantity theory of money; Phillips Curve;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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