Forecasting Chilean inflation with the hybrid new keynesian Phillips curve: globalisation, combination, and accuracy

Abstract

This article analyses the multi-horizon predictive power of the Hybrid New Keynesian Phillips Curve (HNKPC) covering the period from January 2000 to December 2014, for the Chilean economy. A distinctive feature of this article is the use of a Global Vector Autoregression (GVAR) specification of the HNKPC to enforce an open economy version. Another feature is the use of direct measures of inflation expectations—Consensus Forecasts—differing from a fully-founded rational expectations model. The HNKPC point forecasts are evaluated using the Mean Squared Forecast Error statistic and statistically compared with several benchmarks, including combined forecasts. The results indicate that there is evidence not to reject the hypothesis of the HNKPC for the Chilean economy, and it is also robust to alternative specifications. Outof- sample results are mixed between atheoretical benchmarks and the HNKPC by itself or participating in a combined prediction with the random walk. This combined forecast delivers the most accurate forecasts at horizons comprised within a year; whereas, in the long run is not accurate enough to outperform the statistical models.