Inflation
In Aron and Muellbauer (2013b), the authors demonstrate that conceiving of inflation as a process of adjustment of relative prices could improve policy makers' forecasts. Given differences in underlying market conditions, market prices do not move in lockstep, with some prices adjusting with lags to different domestic conditions, including labour costs, house prices and international influences.
By setting out an equilibrium correction model for the price level, an approach pioneered by Sargan (1964), Aron and Muellbauer are better able to model and forecast the time series of US inflation.[214] An application to an emerging market country of similar ideas showed how disaggregated components can additionally improve forecasting accuracy (see Aron and Muellbauer 2012).As with the bulk of John's research, this inflation analysis nicely blends the need to address aggregation and measurement issues with those of developing estimable and robust empirical specifications that are flexible enough to account for several important drivers and for variation in the speed at which the prices of different categories of items adjust towards their equilibrium paths. International influences on the price level and hence on inflation were the theme of Aron et al. (2014b), an analytical survey of the exchange rate pass-through literature with special reference to emerging market countries.
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