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Disruptions to Russian Energy Supply Likely to Weigh on European Output
The Russia-Ukraine war and subsequent oil sanctions from European countries have substantially disrupted the supply of Russian oil and gas. We estimate the effects of these disruptions on European output and find that a decline in the Russian oil and gas supply in 2022 could lead to a sizable drop in European output over 2023–24, though the effect differs across countries and sectors .
Will High Underlying Inflation Persist?
Underlying inflation—the rate of inflation that prevails after temporary imbalances in the economy are resolved—can help policymakers gauge whether current high rates of inflation are likely to persist. Using survey-based inflation expectations, we show that if current inflation forecasts are realized, underlying inflation should decline toward 2 percent in 2024. However, if inflation continues to surprise to the upside, underlying inflation may remain elevated for some time.
Cutting-Edge Methods Did Not Improve Inflation Forecasting during the COVID-19 Pandemic
Amaze Lusompa and Sai A. Sattiraju investigate whether innovations in time-varying parameter models led to improved inflation forecasting during the pandemic. They find that despite their promise prior to the pandemic, forecasting innovations did not improve the accuracy of inflation forecasts relative to a baseline time-varying parameter model during the pandemic. Their results suggest that forecasters may need to develop a new class of forecasting models, introduce new forecasting variables, or rethink how they forecast to yield more effective inflation forecasts during extreme events.
Local Projections, Autocorrelation, and Efficiency
It is well known that Local Projections (LP) residuals are autocorrelated. Conventional wisdom says that LP have to be estimated by OLS with Newey-West (or some type of Heteroskedastic and Autocorrelation Consistent (HAC)) standard errors and that GLS is not possible because the autocorrelation process is unknown and/or because the GLS estimator would be inconsistent. I derive the autocorrelation process of LP and show that it can be corrected for using a consistent GLS estimator. Estimating LP with GLS has three major implications: 1) LP GLS can be less biased, more efficient, and generally ...