Inflation Dynamics: Mistakes in the Forecaster’s Behavior

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“Is the Phillips Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation View in a new window” by Coibion and Gorodnichenko

What questions are the authors attempting to answer in this paper?

In the article Is the Phillip’s Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation by Coibion and Gorodnichenko, the authors address a new meaning of the term ‘Phillips curve’, and they suggest a new understanding for the absent disinflation during the Great Recession (Coibion and Gorodnichenko 198). Nonetheless, the primary question was related to the evaluation of whether the household forecasts are more beneficial for the companies than the professional predictions (Coibion and Gorodnichenko 228). In this case, the authors of the article pay attention to the evaluation of the Phillips curve and understanding its advantages and drawbacks.

Why are these questions important?

The questions provided above are highly significant, as they explain the importance of the accuracy of the inflation forecasts. Finding the answers is critical, as the firms tend to rely on the expectations of the past, and this aspect is the primary cause of errors (Coibion and Gorodnichenko 228). In this case, discovering alternative approaches to professional forecasts will help see a clear image of the current economic situation in the market. Meanwhile, the outcomes can be utilized by the policymakers to enhance the efficiency of the national economy while paying attention to the various hidden factors including disinflation (Coibion and Gorodnichenko 228).

Are recent inflation dynamics in the U.S. consistent with the predictions of the traditional Phillips curve?

Nowadays, Phillip’s curve is still a universal model, which is used to understand the interdependence between the development of the prices and other macroeconomic forces (Coibion and Gorodnichenko 228). This connection is important, as it plays the role in defining the direction in the policy-making. Consequently, it could be said that it describes the current situation in the market in the United States of America.

Nonetheless, Phillip’s curve is related to the number of uncertainties, which require continuous assessment (Yellen par. 4; Lansing 304). In the past years, the changes in inflation rates were presented by decline and value lower than 2% due to a decrease in the import, food, and energy prices (Yellen par. 4). These aspects tend to occur by Phillip’s model, and the inflation will experience an increase in the following years due to the potential contribution of economic growth and other favorable forces.

Describe in detail the data the authors use to answer these questions. What kind of inflation expecta¬tion data do the authors use?

The authors used various sources of data to provide the rationale for their hypothesis and find a suitable solution. In this case, the researchers addressed the topics, which have relation to understanding Phillip’s curve and minimizing the uncertainties (Coibion and Gorodnichenko 200).

In this case, the authors utilized the inflation expectation data by focusing on CPI, Personal Consumption Expenditure, GDP deflator, and the Survey of Professional Forecasters, and crude oil prices (Coibion and Gorodnichenko 200-203). It could be said that these variables help see the presence of disinflation while showing the connection between the macroeconomic concepts. The differences between the analyses are present, as one graph does not consider disinflation, as a significant component. Lastly, based on the factors provided above, these matters assist in understanding the factors, which can influence the understanding of the actual value of inflation.

What econometric approaches and tests are the authors employing in their analysis? What conclusions do the authors make from these econometric tests?

The primary goal of this question is to describe econometric approaches, which assist in understanding Phillip’s model. Friedman’s augmented Phillip’s curve (offers interdependence between stocks, inflation, and the intensity of the economic activity), Keynesian models (prioritize the importance of marginal costs), and Ball’s and Mazumber’s equitation (Coibion and Gorodnichenko 200-203). The findings represent the interdependence between the variables to highlight the necessity to consider different macroeconomic principles to calculate the right amount of inflation during the Great Recession. Meanwhile, the analysis tends to underline the drawbacks of Phillip’s curve and provides the rationale for the absence of disinflation in particular cases. Lastly, it could be said that understanding the reason for the measurement errors is critical in the context of the presented case, and its occurrence was founded in the outcomes portrayed by conducting the econometric analysis.

In the end, is the New Keynesian model able to explain macroeconomic data during the Great Reces¬sion well?

Despite the ability of the Keynesian models to portray the interdependence between the important macroeconomic variables, it is not able to explain the reasoning of the particular processes during the Great Recession. These concepts did not consider and portray disinflation, as an economic phenomenon (Coibion and Gorodnichenko 230). On the contrary, the household forecasts were highlighted as the most relevant approaches for the measurement, as they can present the sensitivity to the price changes, unemployment rates, and other important economic aspects. Based on the factors provided above, it could be said that the Keynesian models can explain the simple economic changes while the Great Recession is complex and involves many factors to be considered.

“Inattentive professional forecasters” by Philippe Andrade and Herve Le Bihan

What questions are the authors attempting to answer in this paper? Why are these important ques¬tions?

The primary questions, which are mentioned in the article Inattentive Professional Forecasters by Andrade and Bihan, are related to the understanding of the reasoning behind not updating information in time and the rationale for the disagreement and frequent errors (Andrade and Bihan 967). Meanwhile, the authors try to determine the possible causes of the mistakes by referring to various principles and models. It could be said that this topic is highly important, as it assists in decreasing the Describe in common language the ideas behind the “sticky information” model of Mankiw and Reis, and the “noisy information” model of Sims and Woodford

In the context of the presented article, the authors utilize the concepts of ‘sticky information’ and ‘noisy information’, which explain the occurrence of inattention (Andrade and Bihan 968). Firstly, the principles of ‘sticky information’ are related to the information signs to the company while being connected to a particular parameter (Stehr and Grundman 214). In this case, the forecasters conduct irregular measures, as the prices for the information are the same (Dover et al. par. 4). It could be said that this approach implies the errors tend to occur due to the lack of financial resources and infrequent measures of information for forecasting.

Speaking of ‘noisy information’, this concept suggests that the forecasters have a tendency to update their projections on the regular basis, but the value of their information is low (Dover et al. par. 4). The mistakes in the forecasts are present due to the insufficiency of the information. The forecasters have a clear understanding of the processes, but their projections might be wrong.

Summarize the authors’ findings. What do the authors learn about how professional forecasters forecast, and does this provide any indication about which model of the information best describes their forecasting behavior?

Lastly, the findings of the article reveal that none of the presented models (‘sticky and noisy’ information) can explain the presence of mistakes in the forecaster’s behavior (Andrade and Bihan 981). Meanwhile, it was depicted that the majority of the decision of the forecasters are defined by the stickiness of the information, and this aspect underlines the potential impact of this principle on the decision-making patterns (Andrade and Bihan 981). As for the selection of the particular model, it is apparent that further research is a necessity, as these models do not provide the answers to this question.

Works Cited

Andrade, Phillipe and Herve Bihan. “Inattentive Professional Forecasters.” Journal of Monetary Economics 60 (2013): 967-982. Print.

Coibion, Olivier, and Yuriy Gorodnichenko. “Is the Phillip’s Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation.” American Economic Journal: Macroeconomics 7.1 (2015): 197-232. Print.

Dovern, Jonas, Ulrich Fritsche, Prakash Loungani and Natalia Tamirisa. How Often Do Forecasters Change Their Minds? New Evidence from 35,000 Forecasts. 2014. Web.

Lansing, Kevin. “Time-varying U.S. inflation dynamics and the New Keynesian Phillips curve.” Review of Economic Dynamics 12.2 (2009): 304-326. Print.

Stehr, Nico, and Reiner Grundman. Knowledge: Critical Concepts. London: Routledge, 2005. Print.

Yellen, Janet. Inflation Dynamics and Monetary Policy. 2015. Web.

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