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Working Paper
A Unified Framework to Estimate Macroeconomic Stars
This paper develops a semi-structural model to jointly estimate “stars” — long-run levels of output (its growth rate), the unemployment rate, the real interest rate, productivity growth, price inflation, and wage inflation. It features links between survey expectations and stars, time-variation in macroeconomic relationships, and stochastic volatility. Survey data help discipline stars’ estimates and have been crucial in estimating a high-dimensional model since the pandemic. The model has desirable real-time properties, competitive forecasting performance, and superior fit to the ...
Journal Article
Macroeconomic models, forecasting, and policymaking
Models of the macroeconomy have gotten quite sophisticated, thanks to decades of development and advances in computing power. Such models have also become indispensable tools for monetary policymakers, useful both for forecasting and comparing different policy options. Their failure to predict the recent financial crisis does not negate their use, it only points to some areas that can be improved.
Working Paper
A Unified Framework to Estimate Macroeconomic Stars
We develop a flexible semi-structural time-series model to estimate jointly several macroeconomic "stars" -- i.e., unobserved long-run equilibrium levels of output (and growth rate of output), the unemployment rate, the real rate of interest, productivity growth, price inflation, and wage inflation. The ingredients of the model are in part motivated by economic theory and in part by the empirical features necessitated by the changing economic environment. Following the recent literature on inflation and interest rate modeling, we explicitly model the links between long-run survey expectations ...
Journal Article
The Likelihood of 2 Percent Inflation in the Next Three Years
This Commentary examines inflation forecasts generated from a range of statistical models that historically have performed well at forecasting inflation. For each model, we look at the most likely future forecast path and the distribution of forecasts around that path. We show that the models project generally rising inflation, but, in contrast to other forecasts, five out of six models assign a less than 50 percent probability to inflation?s being 2 percent or higher over the next three years.
Working Paper
Post-COVID Inflation Dynamics: Higher for Longer
In the December 2022 Summary of Economic Projections (SEP), the median projection for four-quarter core PCE inflation in the fourth quarter of 2025 is 2.1 percent. This same SEP has unemployment rising by nine-tenths, to 4.6 percent, by the end of 2023. We assess the plausibility of this projection using a specific nonlinear model that embeds an empirically successful nonlinear Phillips curve specification into a structural model, identifying it via an underutilized data-dependent method. We model core PCE inflation using three components that align with those noted by Chair Powell in his ...
Working Paper
Forecasting Core Inflation and Its Goods, Housing, and Supercore Components
This paper examines the forecasting efficacy and implications of the recently popular breakdown of core inflation into three components: goods excluding food and energy, services excluding energy and housing, and housing. A comprehensive historical evaluation of the accuracy of point and density forecasts from a range of models and approaches shows that a BVAR with stochastic volatility in aggregate core inflation, its three components, and wage growth is an effective tool for forecasting inflation's components as well as aggregate core inflation. Looking ahead, the model's baseline ...
Journal Article
Adjusting Median and Trimmed-Mean Inflation Rates for Bias Based on Skewness
Median and trimmed-mean inflation rates tend to be useful estimates of trend inflation over long periods, but they can exhibit persistent departures from the underlying trend over shorter horizons. In this Commentary, we document that the extent of this bias is related to the degree of skewness in the distribution of price changes. The shift in the skewness of the cross-sectional price-change distribution during the pandemic means that median PCE and trimmed-mean PCE inflation rates have recently been understating the trend in PCE inflation by about 15 and 35 basis points, respectively.
Working Paper
Post-COVID Inflation Dynamics: Higher for Longer
We implement a novel nonlinear structural model featuring an empirically-successful frequency-dependent and asymmetric Phillips curve; unemployment frequency components interact with three components of core PCE – core goods, housing, and core services ex-housing – and a variable capturing supply shocks. Forecast tests verify model’s accuracy in its unemployment-inflation tradeoffs, crucial for monetary policy. Using this model, we assess the plausibility of the December 2022 Summary of Economic Projections (SEP). By 2025Q4, the SEP projects 2.1 percent inflation; however, conditional ...
Journal Article
Improving inflation forecasts in the medium to long term
To accurately forecast the future rate of inflation, it is imperative to account for inflation?s underlying trend. This is especially important for medium- to long-run forecasts. In this Commentary I demonstrate a simple but powerful technique for incorporating this trend into standard statistical time series models and report the gains to accuracy. I find that incorporating the trend by modeling inflation as gap from an estimated underlying trend leads to substantial gains in forecast accuracy of about 20 percent to 30 percent, two to three years out.
Working Paper
A Unified Framework to Estimate Macroeconomic Stars
We develop a flexible semi-structural time-series model to estimate jointly several macroeconomic "stars" — i.e., unobserved long-run equilibrium levels of output (and growth rate of output), the unemployment rate, the real rate of interest, productivity growth, the price inflation, and wage inflation. The ingredients of the model are in part motivated by economic theory and in part by the empirical features necessitated by the changing economic environment. Following the recent literature on inflation and interest rate modeling, we explicitly model the links between long-run survey ...