No. 13/2002
MODEL SPECIFICATION AND INFLATION FORECAST
UNCERTAINTY
Gunnar Bårdsen
Eilev S. Jansen
Ragnar Nymoen
Abstract:
Three classes of inflation models are discussed: Standard Phillips curves,
New Keynesian Phillips curves and Incomplete Competition models. Their
relative merits in explaining and forecasting inflation are investigated
theoretically and empirically. We establish that Standard Phillips-curve
forecasts are robust to types of structural breaks that harm the Incomplete
Competion model forecasts, but exaggerate forecast uncertainty in periods
with no breaks. As the potential biases in after-break forecast errors
for the Incomplete Competition model can be remedied by intercept corrections,
it offers the best prospect of
successful inflation forecasting.
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