Why Has U.S. Inflation Become Harder to Forecast?

2007/01/18 by James H. Stock, JAMES H. STOCK, MARK W. WATSON +1 · 1,685 citations
Economics, Econometrics and Finance · Mathematics · #Econometrics #Economic, financial, and policy analysis #Economics #Great Moderation #Inflation (cosmology) #Inflation rate #Keynesian economics #Market Dynamics and Volatility #Mathematics #Monetary Policy and Economic Impact #Monetary policy #Multivariate statistics #Statistics #Stochastic volatility #Univariate #Variety (cybernetics) #Volatility (finance)

paper · pdf · doi:10.1111/j.1538-4616.2007.00014.x

published in Journal of money credit and banking 39(s1), 3-33 (Wiley)

openalex publication_date 2007/01/18 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04

Abstract

We examine whether the U.S. rate of price inflation has become harder to forecast and, to the extent that it has, what changes in the inflation process have made it so. The main finding is that the univariate inflation process is well described by an unobserved component trend‐cycle model with stochastic volatility or, equivalently, an integrated moving average process with time‐varying parameters. This model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well.

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