Predicting US CPI-Inflation in the presence of asymmetries, persistence, endogeneity, and conditional heteroscedasticity (original) (raw)

2017

Abstract

In this paper, we construct a multi-predictor framework for US inflation by augmenting the traditional Phillips curve-based inflation model with symmetric and asymmetric oil price changes. We show that the underlying predictors of US inflation exhibit persistence, endogeneity and conditional heteroscedasticity effects which have implications on forecast performance. Thus, we employ the Westerlund and Narayan (WN hereafter) (2014) estimator which allows for these effects in the predictive model. Also, we follow the linear multi-predictor set-up by Makin et al. (2014) which is an extension of the bivariate predictive model of WN (2014). Thereafter, we extend the former in order to construct a nonlinear multi-predictor model that allows for asymmetries based on Shin et al. (2014) approach. Using historical quarterly data for relevant variables ranging from 1957 to 2017, we demonstrate that US inflation is better modelled with the proposed multi-predictor model suggesting the significan...

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