Forecasting industry-level CPI and PPI inflation: Does exchange rate pass-through matter?

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Forecasting industry-level CPI and PPI inflation: Does exchange rate pass-through matter?

Author Info

Bhattacharya, Prasad S.
Thomakos, Dimitrios D.

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Abstract

We show that incorporating the effects of exchange rate pass-through into a model can help in obtaining superior forecasts of domestic, industry-level inflation. Our analysis is based on a multivariate system of domestic inflation, import prices and exchange rates that incorporates restrictions from economic theory. These are restrictions on the transmission channels of the exchange rate pass-through to domestic prices, and are presented as testable hypotheses that lead to model reduction. We provide the results of various tests, including causality and prior restrictions, which support the underlying economic arguments and the model we use. The forecasting results for our model suggest that it has a superior performance overall, jointly producing more accurate forecasts of domestic inflation.

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Publisher Info
Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 24 (2008)
Issue (Month): 1 ()
Pages: 134-150
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Handle: RePEc:eee:intfor:v:24:y:2008:i:1:p:134-150

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Paper
- Dimitrios D. Thomakos & Prasad S. Bhattacharya, 2004. "Forecasting Industry-Level CPI and PPI Inflation: Does Exchange Rate Pass-Through Matter?," Econometric Society 2004 Australasian Meetings 293, Econometric Society. [Downloadable!]
- Prasad S. Bhattacharya & Dimitrios D. Thomakos, 2006. "Forecasting Industry-Level CPI and PPI Inflation: Does Exchange Rate Pass-Through Matter?," Economics Series 2006_10, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance. [Downloadable!]

References listed on IDEAS
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