Introducing a new variable into the Phillips curve may help to improve its usefulness in forecasting future inflation, a researcher from the Federal Reserve Bank of San Francisco finds.
The “interaction variable” Kevin Lansing proposes measures how inflation and the output gap interact over time.
In the economic letter, Lansing compares the predictive accuracy of the standard Philips curve to one that includes his variable. He tests this using data from 1961 to 2018.
Lansing finds the