[Vol.28 No.3] Predictive Probability Estimation of Stagflation in Korea

Human Resources & Administration Department(82-2-759-4114)

Author: Keunhyeong Park(Bank of Korea), Kyu Ho Kang(Korea University)

 The prediction of the short- and long-term stagflation probability has a profound influence on the Bank of Korea's preemptive monetary policy decision-making for economic and price stability. This study estimates the probability of stagflation in Korea over the next two years. To this end, a joint predictive distribution of the inflation rate and the real economic growth rate is generated using univariate and bivariate autoregressive distributed lag (ADL) models. In this process, the optimal prediction model is selected through Bayesian variable selection and precise tuning through out-of-sample prediction. As a result of long-term and short-term out-of-sample predictions for the last 5 years, the joint distribution predictive accuracy was maximized when each variable was independently predicted using the univariate ADL model in most forecasting horizons. As a result of the actual prediction using the optimal model, the probability of stagflation (GDP growth rate below 1% and CPI inflation rate above 4% or two consecutive quarters of decline in real GDP level and CPI inflation rate above 4%) temporarily increased in the fourth quarter of 2022 and then dropped significantly to less than 10%. From these results, it is predicted that the possibility of stagflation is very limited.

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