Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/240348
Year of Publication: 
2021
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 8/2021
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Policymakers and researchers see inflation characterized by cyclical fluctuations driven by changes in resource utilization and temporary shocks, around a trend influenced by inflation expectations. We study the in-sample inflation dynamics and forecast inflation out-of-sample by analyzing a New Keynesian Phillips Curve (NKPC) in the frequency domain. In-sample, while inflation expectations dominate medium-to-long-run cycles, energy prices dominate short cycles and business-to-medium cycles once expectations became anchored. While statistically significant, unemployment is not economically relevant for any cycle. Out-of-sample, forecasts from a low-frequency NKPC significantly outperform several benchmark models. The long-run component of unemployment is key for such remarkable forecasting performance.
Subjects: 
inflation dynamics
inflation forecast
New Keynesian Phillips Curve
frequency domain
wavelets
JEL: 
C53
E31
E37
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-378-2
Document Type: 
Working Paper

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