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Forecasting inflation in post-oil boom years: A case for regime switches?

Author

Listed:
  • Vugar Ahmadov

    (Central Bank of Azerbaijan)

  • Salman Huseynov

    (Central Bank of Azerbaijan, and Institute of Control Systems, National Academy of Sciences)

  • Shaig Adigozalov

    (Central Bank of Azerbaijan)

  • Fuad Mammadov

    (Central Bank of Azerbaijan)

  • Vugar Rahimov

    (Central Bank of Azerbaijan)

Abstract

In this study, we investigate the relative performance of various non-linear models against that of an autoregressive model in forecasting future inflation. We find that non-linear models have trivial forecast superiority over the univariate autoregressive model in terms of central forecast accuracy. They also perform poorly when their forecasts are measured against those of a VAR model. In addition, we also show that non-linear models cannot beat the random walk in terms of central forecast accuracy, which is in line with the previous literature on Azerbaijan during the post-oil boom years. However, we also demonstrate that non-linear models still have clear forecast advantages over both linear and random walk models in predicting forecast density.

Suggested Citation

  • Vugar Ahmadov & Salman Huseynov & Shaig Adigozalov & Fuad Mammadov & Vugar Rahimov, 2018. "Forecasting inflation in post-oil boom years: A case for regime switches?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(2), pages 369-385, April.
    • Handle: RePEc:spr:jecfin:v:42:y:2018:i:2:d:10.1007_s12197-017-9410-1
    DOI: 10.1007/s12197-017-9410-1
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    More about this item

    Keywords

    Inflation; Forecasting; Bayesian methods; Regime switching models;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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