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

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  • Bhattacharya, Prasad S.
  • Thomakos, Dimitrios D.

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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Bibliographic 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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Web page: http://www.elsevier.com/locate/ijforecast

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Cited by:
  1. Ondřej Šimpach & Jitka Langhamrová, 2013. "Forecasting Future Salaries in the Czech Republic Using Stochastic Modelling," Business Systems Research, Society for Promotion of Business Information Technology (BIT), vol. 4(2), pages 4-16.

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