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Accepted at QE: Sticky-Information Forecast paper with Jim Nason

posted May 21, 2020, 3:07 AM by Elmar Mertens
Using state-of-the-art particle filtering and smoothing, we show that inflation forecasts from the US SPF became “sticky” (more inattentive) only with the decline in inflation persistence that occurred after the Volcker disinflation. SPF predictions were much more attentive during the Great Inflation than now.

The Figure below illustrates the importance of time-varying stickiness by comparing compares the MSE of actual SPF forecasts against the MSE of a hypothetical SPF that assumes they had been equally sticky during the Great Inflation as they are now. The MSE losses of those counterfactual forecasts would have been much higher. In contrast, while the stickiness of actual rose, their losses did not deteriorate much, as persistence in inflation declined (and the importance of noise shocks for inflation increased) at the same time. 

More on the paper, including a link to the replication files can be found on mPublications page.