Serial correlation in inflation models could reshape economic forecasting methods.
The researchers studied a model called the New Keynesian Phillips Curve to see if it accurately predicts inflation. They found that the traditional way of estimating inflation expectations may not be accurate. By using a different method, they discovered that there is a pattern in the errors of the model. To fix this issue, they suggest adding more past inflation data to the model. This adjustment helps to improve the accuracy of the predictions.