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The Predictive Content of the Output Gap for Inflation: Resolving In-Sample and Out-of-Sample Evidence

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  • Clark, Todd E.
  • McCracken, Michael W.
Abstract
This paper evaluates potential explanations for the sometimes poor forecasting performance of the Phillips curve. One explanation is that out-of-sample metrics are noisy or, equivalently, have relatively low power. Another potential explanation is instability in the coefficients of the model. To assess these forces, this paper compares sample forecasting results to results from bootstrap simulations of models that either assume stability or allow breaks in the coefficients of the model. This analysis indicates that a significant portion of the weakness of the out-of-sample evidence is attributable to power limitations. But instabilities in the coefficients on the output gap also play a role.

Suggested Citation

  • Clark, Todd E. & McCracken, Michael W., 2006. "The Predictive Content of the Output Gap for Inflation: Resolving In-Sample and Out-of-Sample Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1127-1148, August.
    • Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:5:p:1127-1148
    DOI: 10.1353/mcb.2006.0068
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    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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