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

2007/01/18 by James H. Stock, JAMES H. STOCK, MARK W. WATSON +1 · 5 citations
Economics, Econometrics and Finance · #Monetary Policy and Economic Impact #Market Dynamics and Volatility #Economic, financial, and policy analysis

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

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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