Working Paper: CEPR ID: DP8292
Authors: Antonello Dagostino; Paolo Surico
Abstract: We investigate inflation predictability in the United States across the monetary regimes of the XXth century. The forecasts based on money growth and output growth were significantly more accurate than the forecasts based on past inflation only during the regimes associated with neither a clear nominal anchor nor a credible commitment to fight inflation. These include the years from the outbreak of World War II in 1939 to the implementation of the Bretton Woods Agreements in 1951, and from Nixon's closure of the gold window in 1971 to the end of Volcker?s disinflation in 1983.
Keywords: monetary regimes; Phillips curve; predictability; time-varying models
JEL Codes: E37; E42; E47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflation predictability is the exception rather than the rule (E31) | Inflation predictability (E31) |
| Bivariate VAR model with money growth and output growth significantly more accurate (O42) | Inflation predictability (E31) |
| Bivariate model effectiveness contingent on monetary regime (C54) | Effectiveness of bivariate model (C52) |
| Output growth had marginal predictive power for inflation (O42) | Inflation predictability (E31) |
| Establishing credibility for anti-inflationary policy stance (E61) | Output growth predictive power for inflation (O42) |
| Stable monetary policy framework diminishes ability to forecast inflation accurately (E31) | Inflation forecasting (E31) |