Working Paper: CEPR ID: DP7877
Authors: Janine Aron; John Muellbauer
Abstract: Models for the twelve-month-ahead US rate of inflation, measured by the chain weighted consumer expenditure deflator, are estimated for 1974-99 and subsequent pseudo out-of-sample forecasting performance is examined. Alternative forecasting approaches for different information sets are compared with benchmark univariate autoregressive models, and substantial out-performance is demonstrated. Three key ingredients to the out-performance are: including equilibrium correction terms in relative prices; introducing non-linearities to proxy state dependence in the inflation process; and replacing the information criterion, commonly used in VARs to select lag length, with a ?parsimonious longer lags? (PLL) parameterisation. Forecast pooling or averaging also improves forecast performance.
Keywords: Error Correction Models; Evaluating Forecasts; Model Selection; Multivariate Time Series
JEL Codes: C22; C51; C52; C53; E31; E37; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| parsimonious longer lags (PLL) (E12) | inflation prediction accuracy (E31) |
| equilibrium correction terms (D50) | forecasting performance (C53) |
| nonlinearities in inflation process (E31) | forecasting outcomes (C53) |
| economic indicators (E01) | inflation forecasting (F37) |
| automatic model selection (C52) | forecast performance (G17) |