By Bilal Hafeez 07-05-2019
In: deep-dives, Monetary Policy & Inflation

Improving the Phillips Curve with an Interaction Variable

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Improving the Phillips Curve with an Interaction Variable San Fan Fed finds that modifying the Philips Curve with a multiplicative combination of lagged inflation and the lagged output gap better forecasts inflation. Here's the abstract: "A key challenge for monetary policymakers is to predict where inflation is headed. One promising approach involves modifying a typical Phillips curve predictive regression to include an interaction variable, defined as the multiplicative combination of lagged inflation and the lagged…

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