INFLATION DYNAMIC AND NEW KEYNESIAN PHILLIPS CURVE

Inflation Dynamic & New Keynesian Phillips Curve

Abstract

The paper discusses the inflation prediction in relation to New Keynesian Phillips Curve. The paper examines the inflation RATE presentation of this form we contrast it with outlooks developed from a customary Phillips Curve and time sequence forms at distinct outlook horizons. As state-of-the-art time sequence forms utilised in forecasting we provide work a Bayesian VAR, a accepted VAR and a easy autoregressive model. We find that the New Keynesian Phillips Curve consigns somewhat more unquestionable outlooks of inflation in Austria contrasted to the other forms for longer outlook horizons (more than 3 months) while they are outperformed by the time sequence forms only for the very short outlook horizon. This is reliable with the finding in the publications that functional forms are adept to outperform time sequence forms only for longer horizons.

Table of Contents

Abstract2

Chapter 1: Introduction4

Chapter 2: Theoretical Perspective Inflation dynamics and the New Keynesian Phillips curve8

Chapter 3: Forecasts from the New Keynesian Phillips Curve30

Estimation results33

Chapter 3: Methodology39

Chapter 4: Results43

The outlook from a customary Phillips Curve44

Forecasts from time sequence models46

Chapter 5: Discussion & Conclusion51

References60

Appendix A75

Chapter 1: Introduction

Predicting inflation is a significant task for a cantered bank since the rate of inflation is routinely considered as the most significant sign of monetary policy. Some cantered banks, in specific those chasing direct inflation aiming at, even ascribe the inflation outlook a vital function in their monetary principle strategy. (Christiano et al., 2005) The publications on inflation forecasting has been growing quickly in latest years as more and more forecasting procedures have been evolved and directed to outlook inflation. These are mostly time sequence forms (e.g. component forms, autoregressive forms, and move function models) as well as more functional forms (such as functional VARs or customary Phillips Curve equations). This paper endeavours to provide work a broadly utilised theoretical form of inflation dynamics, the New Keynesian Phillips Curve, for forecasting reasons and compares its forecasting presentation with those of state-of-the-art time sequence models. (Fagan et al., 2001)

The New Keynesian Phillips Curve (NKPC) is actually the most broadly acknowledged idea of inflation dynamics in up to date macroeconomics. (Altissimo et al., 2006) It is drawn from a New Keynesian form distinguished by monopolistic affray and short-run cost rigidity and comprises (in its reduced-form formulation) inflation as a function of anticipated inflation and the firm's genuine marginal cost. The baseline NKPC was evolved in the late 1990s by Galí and Gertler (1999) and other ones (e.g. Sbordone, 2002).1 Depending on the specification and the use of an befitting empirical proxy for genuine marginal cost, it was usually discovered to be thriving in following inflation dynamics in several large developed finances over the last 20-30 years (see Galí & Gertler, 1999, for the US, Galí, Gertler, & López-Salido, 2001; McAdam & Willman, 2003, for the euro locality, and Jondeau & Le Bihan, 2005, for the UK and foremost euro locality countries). Despite its empirical achievement to interpret past inflation, it has until ...