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Forecasting UK Inflation: the Roles of Structural Breaks and Time Disaggregation

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Author Info
Jennifer L. Castle
David F. Hendry

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Abstract

Structural models` inflation forecasts are often inferior to those of naive devices. This chapter theoretically and empirically assesses this for UK annual and quarterly inflation, using the theoretical framework in Clements and Hendry (1998, 1999). Forecasts from equilibrium-correction mechanisms, built by automatic model selection, are compared to various robust devices. Forecast-error taxonomies for aggregated and time-disaggregated information reveal that the impacts of structural breaks are identical between these, so no gain results, helping interpret the empirical findings. Forecast failures in structural models are driven by their deterministic terms, confirming location shifts as a pernicious cause thereof, and explaining the success of robust devices.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 309.

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Date of creation: 2007
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Handle: RePEc:oxf:wpaper:309

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Keywords: Inflation Forecasting; Structural Breaks; Robust Forecasts; Time-disaggregation; Forecast-error Taxonomies;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications

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