Discussion paper

DP7877 New methods for forecasting inflation, applied to the US.

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.

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Citation

Muellbauer, J and J Aron (2010), ‘DP7877 New methods for forecasting inflation, applied to the US.‘, CEPR Discussion Paper No. 7877. CEPR Press, Paris & London. https://cepr.org/publications/dp7877