Model Specification and Inflation Forecast Uncertainty in the Case of Pakistan

Authors

  • Muhammad Azhar Bhatti The Islamia University of Bahawalpur, Pakistan.
  • Ahsan ul Haq Pakistan Institute of Development Economics, Islamabad, Pakistan.
  • Muhammad Atif Nawaz The Islamia University of Bahawalpur, Pakistan.
  • Tusawar Iftikhar Ahmad The Islamia University of Bahawalpur, Pakistan.
  • Snober Fazal The Islamia University of Bahawalpur, Pakistan.

DOI:

https://doi.org/10.52131/pjhss.2023.v11i2.2010

Keywords:

Inflation, Inflation Uncertainty, Standard Phillips Curve, New Keynesian Phillips Curve, Incomplete Competition Model, Unemployment, Output Gap

Abstract

Making a better estimate of Inflation can enable us to make a better guesstimate about its economic repercussions. In modern monetary economics, the standard Phillips Curve model (PCM), the New Keynesian Phillips curve model (NPCM), and the incomplete competition model (ICM) are the alternative econometric models specified to forecast Inflation. The present study intends to identify the appropriate inflation model based on its forecasting performance with its different specifications for Pakistan's Economy.  PCM includes the output gap and unemployment rate, NPCM has forward-looking expectations and uses labor income share instead of the output gap, and ICM identifies the importance of incomplete information on labor and product markets and uses some error correction term (ECT) to forecast Inflation. The relevant ECT has overcome the omitted variable bias. ICM is better in visualization forecasting and has lower root mean square error and mean absolute percentage error than other inflation models. In conclusion, the wage-price dynamics model (ICM) offers the best prospect of a successful inflation forecast in the case of Pakistan.

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Author Biographies

Muhammad Azhar Bhatti, The Islamia University of Bahawalpur, Pakistan.

Lecturer, Department of Economics

Ahsan ul Haq, Pakistan Institute of Development Economics, Islamabad, Pakistan.

Assistant Professor, School of Economics

Muhammad Atif Nawaz , The Islamia University of Bahawalpur, Pakistan.

Associate Professor, Department of Economics

Tusawar Iftikhar Ahmad, The Islamia University of Bahawalpur, Pakistan.

Associate Professor, Department of Economics

Snober Fazal , The Islamia University of Bahawalpur, Pakistan.

Ph.D. Scholar, Department of Economics

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Published

2023-06-30

How to Cite

Bhatti, M. A., ul Haq, A., Nawaz , M. A., Ahmad, T. I., & Fazal , S. (2023). Model Specification and Inflation Forecast Uncertainty in the Case of Pakistan. Pakistan Journal of Humanities and Social Sciences, 11(2), 2874–2887. https://doi.org/10.52131/pjhss.2023.v11i2.2010

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Articles