Macroeconomics

Theoretical physics

Monetary policy

Inflation (cosmology)

Statistics

Chromatography

Bivariate analysis

Economics

Physics

Endogeneity

Mathematics

Autoregressive model

Monetary economics

Econometrics

Financial economics

Chemistry

Sample (material)

Heteroscedasticity

Phillips curve

Oil price

Energy Economics

In this paper, we propose a revision to the traditional (demand side) Phillips curve to capture the supply (cost-push) side of inflation. We adopt the Westerlund and Narayan [WN] (2015) approach which accounts for persistence, endogeneity and conditional heteroscedasticity effects in the predictive regression model. In addition, following the approach of Salisu and Isah (2018), we extend the oil-based bivariate framework of WN (2015) to a multi-predictor set-up in order to augment the traditional Phillips curve-based inflation model with the proposed cost-push factor. Using the OECD countries, we demonstrate that the forecast performance of the traditional Phillips curve tends to improve when it is augmented with oil price both for the in-sample and out-of-sample forecasts. Contrary to the prominent findings in the literature, the augmented Phillips curve model outperforms the first order autoregressive model. Our results are robust to alternative measures of inflation rate and different forecast horizons.

Revisiting the forecasting accuracy of Phillips curve: The role of oil price