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Econometric analysis of switching expectations in UK inflation

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JournalOxford Bulletin of Economics and Statistics
DateAccepted/In press - 13 Nov 2021
DateE-pub ahead of print (current) - 13 Dec 2021
Number of pages23
Early online date13/12/21
Original languageEnglish

Abstract

We estimate with UK data a Phillips curve model with backward-looking and forward-looking methods of determining inflation expectations and with
agents switching between these based on their recent performance. We find that, while on average backward-looking and forward-looking methods have about equal weight, there are considerable movements in the weight given to each method. We show this model has better in-sample fit than other Phillips curve models and this is robust to the methodology chosen. The model out-of-sample forecasts on certain dates do better than other
Phillips curve models and the Atkeson and Ohanian model.

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© 2021 Oxford University and John Wiley & Sons Ltd. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details

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