We investigate empirically the inflation dynamics in New Zealand, a small open economy and a pion... more We investigate empirically the inflation dynamics in New Zealand, a small open economy and a pioneer in inflation targeting, under various open-economy Phillips curve specifications. Our forecasting exercise suggests that open-economy Phillips curves under standard measures of global slack do not help forecast domestic inflation, possibly indicating measurement problems with global slack itself. In turn, under a stable inflation target we still find that (i) global inflation and (ii) global inflation and oil prices have information content for headline CPI and core CPI inflation over the 1997:Q3-2015:Q1 period and appear to be reliable proxies for global slack in forecasting inflation.
We evaluate the performance of inflation forecasts based on the open-economy Phillips curve by ex... more 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 (Martínez-García and Wynne (2010), Kabukcuoglu and Martínez-García (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. 75201. 214-922-5194. enrique.martinez-garcia@dal.frb.org. We would like to thank Todd Clark and Ed Knotek for helpful suggestions and Paulo Surico for sharing his Matlab codes. We acknowledge the excellent research assistance provided by Valerie Grossman and the help of Arthur Hinojosa. All remaining errors are ours alone. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System.
We investigate empirically the inflation dynamics in New Zealand, a small open economy and a pion... more We investigate empirically the inflation dynamics in New Zealand, a small open economy and a pioneer in inflation targeting, under various open-economy Phillips curve specifications. Our forecasting exercise suggests that open-economy Phillips curves under standard measures of global slack do not help forecast domestic inflation, possibly indicating measurement problems with global slack itself. In turn, under a stable inflation target we still find that (i) global inflation and (ii) global inflation and oil prices have information content for headline CPI and core CPI inflation over the 1997:Q3-2015:Q1 period and appear to be reliable proxies for global slack in forecasting inflation.
We evaluate the performance of inflation forecasts based on the open-economy Phillips curve by ex... more 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 (Martínez-García and Wynne (2010), Kabukcuoglu and Martínez-García (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. 75201. 214-922-5194. enrique.martinez-garcia@dal.frb.org. We would like to thank Todd Clark and Ed Knotek for helpful suggestions and Paulo Surico for sharing his Matlab codes. We acknowledge the excellent research assistance provided by Valerie Grossman and the help of Arthur Hinojosa. All remaining errors are ours alone. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System.
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