INFLATION FORECASTING - A COMPARISON BETWEEN CONVENTIONAL PHILLIPS CURVES AND NEW KEYNESIAN PHILLIPS CURVE

Original scientific paper
Autor: Nataša Kožul PhD

Summary: The existence of the relationship between interest rates and inflation is a well known fact and much research has focused on establishing the contribution of inflation in the observed and forecast interest rates. However, what such works fail to consider is that inflation forecasting as a complex issue, one that remains largely unresolved to this day. Traditionally, most inflation measures and forecasts focused on historical data and the relationships established between historical inflation and real economic variables observed at the time. As accurate inflation measure is a central issue in macroeconomics and especially in monetary policy analysis, this paper will present an overview of the inflation forecasting models and make an evaluation of their accuracy and usefulness in forecasting future economic trends. Different variants of classic Phillips Curve, all based on the non-accelerating inflation rate of unemployment (the NAIRU), will be examined. This will be contrasted with the latest developments in inflation modelling, known as Keynesian Phillips Curve.

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