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Inference and Forecasting Based on the Phillips Curve

Kun Ho, Kim / Suna, Park

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Abstract

In this paper, we conduct uniform inference of two widely used versions of the Phillips curve, specifically the random-walk Phillips curve and the New-Keynesian Phillips curve (NKPC). For both specifications, we propose a potentially time-varying natural unemployment (NAIRU) to address the uncertainty surrounding the inflation-unemployment trade-off. The inference is conducted through the construction of what is known as the uniform confidence band (UCB). The proposed methodology is then applied to point-ahead inflation forecasting for the Korean economy. This paper finds that the forecasts can benefit from conducting UCB-based inference and that the inference results have important policy implications.

Issue Date
2016-05-31
Keywords
Time-varying NAIRU; Random-walk Phillips curve; New-Keynesian Phillips curve; Uniform confidence band; Model validation; Inflation forecasting
DOI
https://doi.org/10.23895/kdijep.2016.38.2.1
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