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Cambridge Journal of Economics 28:37-57 (2004)
Cambridge Journal of Economics, Vol. 28, No. 1, © Cambridge Political Economy Society 2004; all rights reserved

Alternative indicators for predicting the probability of declining inflation: evidence from the US

Sungjun Kang, Kwangwoo Park and Ronald A. Ratti*

Address for correspondence: Kwangwoo Park, College of Business Administration, Chung-Ang University, Seoul 156-756, Korea; email: kpark3{at}cau.ac.kr

JEL classifications: C25, E31, E37, G18

The performance of inflation indicators for predicting the probability of inflation falling inside constant and moving targets is considered with a probit model using US data. Given the Federal Reserve System's emphasis on achieving price stability, particular attention is given to the target that future inflation will be below recent inflation. In contrast with earlier years, the unemployment and capacity utilisation rates do not perform well in forecasting the direction of inflation in the mid and late 1990s. We suggest that extending the Keynesian Phillips curve analysis to consider changes in labour market conditions, technological advance and worker skills, and openness will increase understanding of these issues.

Key Words: Probit model • Out-of-sample forecast • Inflation targets • Inflation indicators • Keynesian Phillips curve

Manuscript received February 13, 2001; final version received August 20, 2003.


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