Inflation as a global phenomenon - Some implications for inflation modelling and forecasting: Model derivations and additional results

Abstract

We model local inflation dynamics using global inflation and domestic slack motivated by a novel interpretation of the implications of the workhorse open-economy New Keynesian model. We evaluate the performance of inflation forecasts based on the theoretically-consistent single-equation forecasting speci cation implied by the model, exploiting the international linkages of inflation. In this on-line appendix, we provide a detailed description of the structure of the model underlying our analysis from first principles. Furthermore, we characterize the solution of the log-linearized model and derive analytically the key equilibrium relationships that we use for forecasting. We make note in particular of the role that the slope of the Phillips curve plays in the equilibrium solution of the model and for forecasting purposes. We also include additional results (robustness checks) that support and complement our in-sample analysis of the fit of the model and our pseudo out-of-sample forecasting evaluation exercises.