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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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  1. Sharon Kozicki & P.A. Tinsley, 2003. "Permanent and transitory policy shocks in an empirical macro model with asymmetric information," Research Working Paper RWP 03-09, Federal Reserve Bank of Kansas City.
  2. Athanasios Orphanides & John C. Williams, 2006. "Inflation targeting under imperfect knowledge," Finance and Economics Discussion Series 2006-20, Board of Governors of the Federal Reserve System (U.S.).
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  8. Meredith Beechey & Pär Österholm, 2012. "The Rise and Fall of U.S. Inflation Persistence," International Journal of Central Banking, International Journal of Central Banking, vol. 8(3), pages 55-86, September.
  9. Athanasios Orphanides & John C. Williams, 2003. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," NBER Working Papers 9884, National Bureau of Economic Research, Inc.
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  16. Junttila, Juha, 2001. "Testing an Augmented Fisher Hypothesis for a Small Open Economy: The Case of Finland," Journal of Macroeconomics, Elsevier, vol. 23(4), pages 577-599, October.
  17. Malin Adolfson & Michael K. Andersson & Jesper Lindé & Mattias Villani & Anders Vredin, 2007. "Modern Forecasting Models in Action: Improving Macroeconomic Analyses at Central Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 111-144, December.
  18. 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.
  19. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  20. James H. Stock & Mark W. Watson, 2007. "Erratum to "Why Has U.S. Inflation Become Harder to Forecast?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
  21. Jeromin Zettelmeyer & Pär Österholm, 2007. "The Effect of External Conditionson Growth in Latin America," IMF Working Papers 07/176, International Monetary Fund.
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Citations

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Cited by:
  1. Jonsson, Thomas & Österholm, Pär, 2009. "The Properties of Survey-Based Inflation Expectations in Sweden," Working Paper 114, National Institute of Economic Research.
  2. 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.
  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. Antipin, Jan-Erik & Boumediene, Farid Jimmy & Österholm, Pär, 2012. "Forecasting Inflation Using Constant Gain Least Squares," Working Paper 126, National Institute of Economic Research.
  5. Karlsson, Sune, 2012. "Forecasting with Bayesian Vector Autoregressions," Working Papers 2012:12, Örebro University, School of Business.

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