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Forecasting Inflation in Mongolia: A Dynamic Model Averaging Approach

Author

Listed:
  • Doojav Gan-Ochir

    (Bank of Mongolia, Baga Toiruu 3, Ulaanbaatar 46, 15160, Mongolia)

  • Luvsannyam Davaajargal

    (Research and Statistics Department, Bank of Mongolia, Baga Toiruu 3, Ulaanbaatar 46, 15160, Mongolia)

Abstract

This paper investigates the use of the dynamic model averaging (DMA) approach for identifying good inflation predictors and forecasting inflation in Mongolia, one of the most commodity-dependent economies. The DMA approach allows for both a set of predictors for inflation and marginal effects of predictors to change over time. Our empirical work resulted in several novel findings. First, external variables (i.e., China’s growth, China’s inflation, and change in oil price) play an important role in forecasting inflation and change considerably over time and over forecast horizons. Second, among domestic variables, wage inflation and M2 growth are currently the best predictors for short and longer forecast horizons. Third, the use of DMA leads to substantial improvements in forecast performance, and DMA (2,15) with the chosen forgetting factors is the best performer in predicting inflation for Mongolia.

Suggested Citation

  • Doojav Gan-Ochir & Luvsannyam Davaajargal, 2023. "Forecasting Inflation in Mongolia: A Dynamic Model Averaging Approach," Journal of Time Series Econometrics, De Gruyter, vol. 15(1), pages 27-48, January.
    • Handle: RePEc:bpj:jtsmet:v:15:y:2023:i:1:p:27-48:n:4
    DOI: 10.1515/jtse-2020-0021
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    More about this item

    Keywords

    inflation; dynamic model averaging; time-varying parameter; forecasting;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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