ForecastinginflationandtheGreatRecession;.pdf

Forecasting inflation and the Great Recession Marco Bassetto, Todd Messer, and Christine Ostrowski Introduction and summary the volatile energy and food sectors. Inflation did drop In 2001, Atkeson and Ohanian?(2001) presented a in 2008, at the same time as the economy was contract- challenge for most statistical models of (U.S.) inflation, ing, but this drop could not be forecasted based on showing that for the period 1985–99, forecasting future the benign economic data of 2007. More importantly, inflation to remain at its most recently observed value inflation recovered between 2009 and 2010. (the “random-walk” hypothesis) would outperform more- We are not the first to point out that inflation -re sophisticated models that incorporated information from mained remarkably stable in the face of serious economic many other economic variables, such as unemployment. weakness over the last five years: This is discussed by Brave and Fisher?(2004) expanded and qualified this Hall?(2011), Ball and Mazumder (2011), and Simon, observation: They found that it did not necessarily hold true for periods other than 1985–99, but they also con- Marco Bassetto is a professor of macroeconomics at University firmed that it is difficult to find a model that would -per College London, a senior economist and research advisor in the Economic Research Department of the Federal Reserve Bank form better than the simple random walk consistently of Chicago, and a member of the Centre for Macroeconomics. across a variety of sample periods. Todd Messer is an associate economist and Christine Ostrowski In more recent years, inflation has appeared to be is a senior associate economist in the Economic Research Department of the Federal Reserve Bank of Chicago. The more stable than in the past, and using a simple constan