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Evaluating inflation forecast models for Poland: Openness matters, money does not (but its cost does)

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  • Mukherjee, Deepraj
  • Kemme, David

Abstract

Countries in which inflation targeting has been adopted require high quality inflation forecasts. The Polish National Bank adopted a variant of implicit inflation targeting and therefore the ability to forecast inflation is critically important to policy makers. Since the domestic price formation process is still evolving, medium term inflation forecasting is often difficult. Using quarterly data from 1995-2007, we estimate and evaluate three types of models for inflation forecasting: (1) output gap models, (2) models involving money, and (3) models which bring the foreign sector into the price formation process. We find that openness is significant in the price formation process and inflation targeting is associated with lower inflation. Traditional measures of forecast accuracy indicate that the simple price gap version of the P* model and the money demand model perform best of this group for medium term forecasting.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14952.

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Date of creation: 12 Jul 2008
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Handle: RePEc:pra:mprapa:14952

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Keywords: Monetary policy; inflation; forecasting; models.;

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  1. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202 National Bureau of Economic Research, Inc.
  2. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," NBER Working Papers 12163, National Bureau of Economic Research, Inc.
  3. Céline Allard, 2007. "Inflation in Poland," IMF Working Papers 07/41, International Monetary Fund.
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