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Forecasting inflation in an inflation-targeting regime: A role for informative steady-state priors

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  • Beechey, Meredith
  • Österholm, Pär

Abstract

Inflation targeting as a monetary-policy regime is widely associated with an explicit numerical target for the rate of inflation. This paper investigates whether the forecasting performance of Bayesian autoregressive models can be improved by incorporating information about the target. We compare a mean-adjusted specification, which allows an informative prior on the distribution for the steady state of the process, to traditional methodology. We find that the out-of-sample forecasts of the mean-adjusted autoregressive model outperform those of the traditional specification, often by non-trivial amounts, for five early adopters of inflation targeting. It is also noted that as the sample lengthens, the posterior distribution of steady-state inflation narrows more for countries with explicit point targets.

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Bibliographic Info

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

Volume (Year): 26 (2010)
Issue (Month): 2 (April)
Pages: 248-264

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Handle: RePEc:eee:intfor:v:26:y::i:2:p:248-264

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

Related research

Keywords: Monetary policy Central bank preferences;

References

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  5. Kirstin Hubrich, 2004. "Forecasting euro area inflation: Does aggregating forecasts by HICP component improve forecast accuracy?," Computing in Economics and Finance 2004 230, Society for Computational Economics.
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  17. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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  19. Meredith Beechey & Par Osterholm, 2007. "The rise and fall of U.S. inflation persistence," Finance and Economics Discussion Series 2007-26, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Thomas Jonsson & Pär Österholm, 2012. "The properties of survey-based inflation expectations in Sweden," Empirical Economics, Springer, vol. 42(1), pages 79-94, February.
  2. Karlsson, Sune, 2012. "Forecasting with Bayesian Vector Autoregressions," Working Papers 2012:12, Örebro University, School of Business.
  3. Andrés González & Kirstin Hubrich & Timo Teräsvirta, 2009. "Forecasting inflation with gradual regime shifts and exogenous information," CREATES Research Papers 2009-03, School of Economics and Management, University of Aarhus.
  4. Österholm, Pär, 2012. "The limited usefulness of macroeconomic Bayesian VARs when estimating the probability of a US recession," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 76-86.
  5. Antipin, Jan-Erik & Boumediene, Farid Jimmy & Österholm, Pär, 2012. "Forecasting Inflation Using Constant Gain Least Squares," Working Paper 126, National Institute of Economic Research.

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