Inference and Forecasting Based on the Phillips Curve

• Main Authors: KIM, KUN HO, PARK, SUNA
• Format: Article
• Language: English
• Published: Korea Development Institute 2016-05-01
• Series: KDI Journal of Economic Policy
• Subjects: Timevarying NAIRU; Randomwalk Phillips curve; NewKeynesian Phillips curve; Uniform confidence band; Model validation; Inflation forecasting
• Online Access: https://doi.org/10.23895/kdijep.2016.38.2.1

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.