Forecasting Inflation Using Phillips Curve

                                        Author: Diana Gabrielyan 

In this paper I studied the forecasting ability of various Phillips curve specifications. Pseudo out-of-sample exercises are performed to forecast the Swedish inflation over the period 1980-2014. Three measures of inflation are considered (headline inflation, underlying inflation, GDP deflator inflation), in addition to different activity variables, various econometric specifications and different sample periods. Although, the results indicate heterogeneity in individual model performance and evidence for model instability, yet, in general, the Phillips curve models improve across the random walk benchmark for both headline inflation and underlying inflation, and fail to beat the random walk benchmark for GDP deflator inflation. Phillips curve forecasts beat the random walk benchmark especially for period 2004-2013. I also take into account the monetary regime change in 1993, from exchange rate targeting to inflation targeting. The results suggest that the performance of Phillips curve depends to whether the data used for making the predicitons was under the inflation targeting regime or not.