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Short-term inflation projections model and its assessment in Latvia

Author

Listed:
  • Andrejs Bessonovs

    (Monetary Policy Department, Latvijas Banka, Riga, Latvia)

  • Olegs Krasnopjorovs

    (Monetary Policy Department, Latvijas Banka, Riga, Latvia)

Abstract

This paper builds a short-term inflation projections (STIP) model for Latvia. The model is designed to forecast highly disaggregated consumer prices using cointegrated ARDL approach of [Pesaran, M., & Shin, Y. (1998). An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis. Econometric Society Monographs, 31, 371–413.]. We assess the forecast accuracy of STIP model using out-of-sample forecast exercise and show that our model outperforms both aggregated and disaggregated AR(1) benchmarks. Across inflation components, the forecast accuracy gains are 20–30% forecasting 3 months ahead and 15–55% forecasting 12 months ahead.

Suggested Citation

  • Andrejs Bessonovs & Olegs Krasnopjorovs, 2021. "Short-term inflation projections model and its assessment in Latvia," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 21(2), pages 184-204.
    • Handle: RePEc:bic:journl:v:21:y:2021:i:2:p:184-204
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    More about this item

    Keywords

    Inflation forecasting; autoregressive distributed lag model; disaggregated approach; oil prices; food commodity prices; labour costs;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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