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Inflation Forecasting in Chile

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  • Francisco Nadal De Simone

Abstract

This study estimates two models of Chilean inflation with time-varying parameters during the sample period 1990-1999. The first model is based on the Phillips curve and the second represents a small open economy with an inflation-targeting framework. The out-of-sample inflation forecasts of the two models are compared with the out-of-sample inflation forecasts produced by simple time series models à la Box-Jenkins. The most important results are: inflation forecasts produced by models that include the official, pre-announced inflation target are better that those produced by models that do not include it; the Phillips curve model produces better out-of-sample forecasts than the small open economy model; although for the short run the simple Box-Jenkins models produce better out-of-sample forecasts than the Phillips curve model, their forecasting ability deteriorates rapidly in the medium term. In general, including Markov-switching in the two models does not help to explain a significant part of the conditional variance in the forecast error. It is important to stress, however, that as the monetary policy regime enters its steady state in 2001, the relative ranking of the inflation forecast models may change.

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Bibliographic Info

Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 4 (2001)
Issue (Month): 3 (December)
Pages: 59-85

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Handle: RePEc:chb:bcchec:v:4:y:2001:i:3:p:59-85

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  1. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
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  6. Francisco de A. Nadal-De Simone, 2001. "Inflation targeting in a small open economy: The behaviour of price variables," New Zealand Economic Papers, Taylor & Francis Journals, vol. 35(1), pages 101-142.
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  12. Burmeister, Edwin & Wall, Kent D & Hamilton, James D, 1986. "Estimation of Unobserved Expected Monthly Inflation Using Kalman Filtering," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(2), pages 147-60, April.
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  15. Weshah Razzak, 1997. "The inflation-output trade-off: Is the Phillips Curve symmetric? A policy lesson from New Zealand," Reserve Bank of New Zealand Discussion Paper Series G97/2, Reserve Bank of New Zealand.
  16. Brunner, Karl & Cukierman, Alex & Meltzer, Allan H., 1983. "Money and economic activity, inventories and business cycles," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 281-319.
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  18. Kim, Chang-Jin, 1993. "Sources of Monetary Growth Uncertainty and Economic Activity: The Time-Varying-Parameter Model with Heteroskedastic Disturbances," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 483-92, August.
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