Do professional forecasters believe in the Phillips curve?

Abstract

The expectations-augmented Phillips curve (PC) is a cornerstone of many macroeconomic models. We consider the extent to which professional forecasters’ inflation and unemployment rate forecasts are ‘theory consistent’, and find much heterogeneity. Perceptions about the responsiveness of inflation to the unemployment rate are shown to depend on whether the respondent was active earlier or later during the period 1981–2019, and on whether the respondent happened to forecast at times of tight labour markets.

Theory consistency is related to more accurate forecasts at the shortest horizon but not significantly so at longer horizons. At longer horizons PC-model heterogeneity accounts for the lion’s share of the observed disagreement in reported inflation forecasts.