Friday, January 8, 2010

The "camp view" also identified at the St. Louis FED! (fg)

The last posts of amv an me dealt with a recently written working paper of my fellow blogger os, a university colleague and myself about the camp view of inflation forecasts. It discusses the dynamics of disagreement about the inflation outlook on part of market participants. Evidence is extracted from the survey of professional forecasters of both sides of the atlantic, i.e. the US and the euro area. For a critical assesement see the post of amv. I think, I can agree with my friend that from a theoretical point of view there are sensible reservations to call the one camp the "monetarist" camp. This has been rightly made clear in one of my other working papers written with os on monetary beliefs and heterogenous expectations. We need to change the terminus in the current paper. Thanks amv for the pointer!

Still, our statements hit the bull's eye when it comes to the dangers of the inflation outlook in the medium-term:

The Federal Reserve Bank of St. Louis today published an analysis according to which inflation may be the next dragon to fight. Researcher Kevin L. Kliesen has deteced forecasting camps in the Blue Chip survey! Here are some extracts:
  • A considerable amount of disagreement seems to exist among economists about the inflation outlook over the next few years
  • Looking at past five-year forecasts of the average Consumer Price Index (CPI) inflation rate from Blue Chip Economic Indicators, Kliesen noted that when inflation was relatively high and variable, such as the late 1980s and early 1990s, there was sizable disagreement among forecasters. In contrast, during periods when inflation was relatively low and stable, such as the mid-1990s to mid-2000s, forecasters tended to disagree less about the inflation outlook.
  • Ultimately, one’s view of the inflation outlook over the next few years depends on one’s view of how to best forecast inflation over that horizon,” Kliesen said, noting that economists use several different forecasting methods. These methods include tracking the growth rate of the money supply relative to the growth rate of real GDP; viewing the inflation process as a random walk; or using some variant of the Phillips Curve (or what is now often called the New Keynesian model.) According to an August 2009 survey by the Federal Reserve Bank of Philadelphia, nearly two-thirds of professional forecasters use a variant of the Phillips Curve to forecast inflation
  • Uncertainty remains over how the Fed will rein in the potential acceleration in money growth as the economy improves
How nice!