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Simulating Inflation Forecasting in Real-Time: How Useful Is a Simple Phillips Curve in Germany, the UK, and the US?

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  • Mr. Jens R Clausen
  • Bianca Clausen

Abstract

This paper simulates out-of-sample inflation forecasting for Germany, the UK, and the US. In contrast to other studies, we use output gaps estimated with unrevised real-time GDP data. This exercise assumes an information set similar to that available to a policymaker at a given point in time since GDP data is subject to sometimes substantial revisions. In addition to using real-time datasets for the UK and the US, we employ a dataset for real-time German GDP data not used before. We find that Phillips curves based on ex post output gaps generally improve the accuracy of inflation forecasts compared to an AR(1) forecast but that real-time output gaps often do not help forecasting inflation. This raises the question how operationally useful certain output gap estimates are for forecasting inflation.

Suggested Citation

  • Mr. Jens R Clausen & Bianca Clausen, 2010. "Simulating Inflation Forecasting in Real-Time: How Useful Is a Simple Phillips Curve in Germany, the UK, and the US?," IMF Working Papers 2010/052, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2010/052
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    Cited by:

    1. Lillian Kamal, 2014. "Do GAP Models Still have a Role to Play in Forecasting Inflation?," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 8(3), pages 1-12.
    2. Vijay Victor & Joshy Joseph Karakunnel & Swetha Loganathan & Daniel Francois Meyer, 2021. "From a Recession to the COVID-19 Pandemic: Inflation–Unemployment Comparison between the UK and India," Economies, MDPI, vol. 9(2), pages 1-19, May.
    3. Croonenbroeck, Carsten & Stadtmann, Georg, 2012. "Evaluating Phillips curve based inflation forecasts in Europe: A note," Discussion Papers 329, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.

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    Keywords

    WP; GDP; output gap series;
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