We thank Jonas Fisher for bringing several of the issues discussed in this paper to our attention in a 1999 conversation; Luca Benati for (more recent) helpful suggestions; and Matthew Shapiro, Robert Gordon, and two anonymous referees for helpful comments on an earlier draft. Replications files for the results in this paper can be downloaded from http://www.princeton.edu/~mwatson. This research was funded in part by NSF grant SBR-0214131.
Why Has U.S. Inflation Become Harder to Forecast?
Article first published online: 18 JAN 2007
Journal of Money, Credit and Banking
Volume 39, Issue Supplement s1, pages 3–33, February 2007
How to Cite
STOCK, J. H. and WATSON, M. W. (2007), Why Has U.S. Inflation Become Harder to Forecast?. Journal of Money, Credit and Banking, 39: 3–33. doi: 10.1111/j.1538-4616.2007.00014.x
- Issue published online: 18 JAN 2007
- Article first published online: 18 JAN 2007
- Received October 3, 2005; and accepted in revised form September 19, 2006.
Vol. 39, Issue 7, 1849, Article first published online: 13 SEP 2007
- Phillips curve;
- trend-cycle model;
- moving average;
- great moderation
We examine whether the U.S. rate of price inflation has become harder to forecast and, to the extent that it has, what changes in the inflation process have made it so. The main finding is that the univariate inflation process is well described by an unobserved component trend-cycle model with stochastic volatility or, equivalently, an integrated moving average process with time-varying parameters. This model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well.