PREDICTING INFLATION: DOES THE QUANTITY THEORY HELP?

Various inflation forecasting models are compared for the period 1979–2003 using a simulated out‐of‐sample forecasting framework. Our findings are (1) M2 has marginal predictive content for inflation; (2) it is necessary to allow for the possibility that money, prices, and output are cointegrated; and (3) cointegration vector parameter estimation error is important when making out‐of‐sample forecasts. Consistent with previous work, we find a structural break in the early 1990s, but the break was easily detected and would not have affected out‐of‐sample inflation forecasts. Two Monte Carlo experiments that lend credence to our findings are also reported on.(JEL E31 , C32 )