Inflation as a Global Phenomenon-Some Implications for Policy Analysis and Forecasting

We evaluate the performance of inflation forecasts based on the open-economy Phillips curve by exploiting the spatial pattern of international propagation of inflation. We model these spatial linkages using global inflation and either domestic slack or oil price fluctuations, motivated by a novel in...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Kabukcuoglu, Ayse, Martinez-Garcia, Enrique
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2015
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Summary:We evaluate the performance of inflation forecasts based on the open-economy Phillips curve by exploiting the spatial pattern of international propagation of inflation. We model these spatial linkages using global inflation and either domestic slack or oil price fluctuations, motivated by a novel interpretation of the forecasting implications of the workhorse open-economy New Keynesian model (Martinez-Garcia and Wynne (2010), Kabukcuoglu and Martinez-Garcia (2014)). We find that incorporating spatial interactions yields significantly more accurate forecasts of local inflation in 14 advanced countries (including the U.S.) than a simple autoregressive model that captures only the temporal dimension of the inflation dynamics.