Can the Inflation of the 1970s be Explained?

Abstract

Can t he Inflalon of t he 1970sbe Explained?MANY STANDARDS inflation has been a "surprise" during the past six years. Errors in forecasting inflation have increased markedly compared with earlier periods. For instance, during the interval 1971:3 to 1975:4 the root mean-square error of the Livingston panel of economists in forecasting the consumer price index six months ahead was 3.5 percentage points at an annual rate, compared with an error of 1.6 percentage points over the previous seventeen years.' Not only did the panel forecasters fail to predict the increased variance of the inflation rate in the 1970s, but also they fell far short in predicting the cumulative total price change between 1971 and 1976-24.0 percent compared with the actual change of 34.0 percent.2 Most of the error occurred during the four quarters of 1974, Note: This research has been supported by the National Science Foundation. I am grateful to my research assistant, Joseph Peek, for his superb efficiency in compiling and creating the complex data base on which the paper depends. Helpful suggestions were received from participants in seminars at Northwestern, the University of California at Berkeley, and the Federal Reserve Banks of San Francisco and Philadelphia. 1. The Livingston forecasts were obtained from John A. Carlson, "A Study of Price Forecasts," Annals of Economic and Social Measurement, vol. 6 (Winter 1977), table 1, pp. 33-34. I calculated the errors by comparing the six-month-ahead forecasts with the change in the consumer price index in the two relevant quarters. For instance, Carlson's calculation of the predicted quarterly rate of change between December 1973 and June 1974 is compared with the average quarterly rate of change of the CPI in the first and second quarters of 1974. The "previous seventeen years" runs from 1954:1 to 1971:2. 2. The actual figure refers to the sum of the quarterly rates of change of the CPI in the interval 1971:3 through 1976:2. The forecast figure is the sum of the sixmonth predicted changes calculated by Carlson from the Livingston panel data for the ten surveys between June 1971 and December 1975.253 3. The errors for the forecasts from five large-scale models compiled by McNees were similar. The four-quarter-ahead forecast made in 1973:4 for the change in the GNP deflator to 1974:4 was 6.

Regulation and the Neo‐Wicksellian Approach to Monetary Policy

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Regulation and the Neo-Wicksellian Approach to Monetary Policy

“…where NIXON and NIXOFF are Gordon's (1977) 0-1 variables for the imposition (NIXON = 1 over 1971:Q3-1972:Q3; 0 otherwise) and lifting of the Nixon wage-price controls (NIXOFF = 1 in 1974:Q2-75:Q1; 0 otherwise) for models of contemporaneous inflation. 1 RegQ equals the extent to which a market interest rate exceeded a deposit rate ceiling, and entails selecting which deposit rate to use and addressing market interest rate-based deposits introduced before most deposit rate ceilings were lifted in 1983.…”

Forecasting Inflation in Emerging Markets by Using the Phillips Curve and Alternative Time Series Models

“…The other approach uses deviations of output from potential; namely, output gap (see, for example, Gordon 1977;Sachs 1980). The other approach uses deviations of output from potential; namely, output gap (see, for example, Gordon 1977;Sachs 1980).…”