WHO CONTROLS INFLATION IN AUSTRIA?
AbstractWe model the rate of inflation and unemployment in Austria since the early 1960s within the
Phillips/Fisher framework. The change in labor force is the driving force representing economic activity in the
Phillips curve. For Austria, this macroeconomic variable was first tested as a predictor of inflation and
unemployment in 2005 with the involved time series ended in 2003. Here we extend all series by nine new
readings available since 2003 and re-estimate the previously estimated relationships between inflation,
unemployment, and labor force. As before, a structural break is allowed in these relationships, which is related to
numerous changes in definitions in the 1980s. The break year is estimated together with other model parameters
by the Boundary Element Method with the LSQ fitting between observed and predicted integral curves. The
precision of inflation prediction, as described by the root-mean-square (forecasting) error is by 20% to 70% better
than that estimated by AR(1) model. The estimates of model forecasting error are available for those time series
where the change in labor force leads by one (the GDP deflator) or two (CPI) years. For the whole period
between 1965 and 2012 as well as for the intervals before and after the structural break (1986 for all inflation
models) separately, our model is superior to the naïve forecasting, which in turn, is not worse than any other
forecasting model. The level of statistical reliability and the predictive power of the link between inflation and
labor force imply that the National Bank of Austria does not control inflation and unemployment beyond revisions
to definitions. The labor force projection provided by Statistic Austria allows foreseeing inflation at a forty-year
horizon: the rate of CPI inflation will hover around 1.3% and the GDP deflator will likely sink below zero between
2018 and 2034.
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