One objective of this paper is to ascertain whether the recent performance of inflation is in within the context of a canonical Phillips curve in which price inflation depends on the unemployment rate, past price inflation, and standard measures of price supply shocks. The upper panel of the figure contains one-quarter-ahead forecast errors based on successive re-estimates of the equation over samples whose starting point is held fixed at 1955: Q1 and whose ending point advances one quarter at a time. The forecasts make use of the actual values of explanatory variables. With no individual error, this decade lies outside of the 95 percent confidence range, inflation has consistently fallen short of the model's predictions over the past five years.Given the run of negative prediction errors, multi-period forecast errors and their confidence bands provide a better graphical depiction of the probability of the equation's recent performance. The lower panel of the figure plots the sequence of four-quarter-ahead forecast errors.
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