Advances in forecasting: An introduction in light of the debate on inflation forecasting

Abstract

AbstractThe sharp rise in inflation during the past few years has engendered comparisons with the great inflation of the 1970s and early 1980s. Like that earlier episode, the recent inflation has been underpinned by supply‐side shocks and, in the case of the United States, by highly accommodative fiscal and monetary policies. Like that early episode, the recent inflation has been largely unpredicted; it caught US policy makers by surprise, despite the fact that several prominent economists had warned early on that fiscal and monetary policies were setting the stage for an upsurge in inflation. To motivate this special issue, we provide a brief account of the policy miscues and policy debates that resulted from the large forecast errors in predicting the upsurge in inflation in 2021 and 2022. We then provide an overview of the papers in this issue, which address a range of methodological and empirical issues related to forecasting and highlight the dilemmas faced by agents within the economy and policy makers.