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The Dynamics of Inflation and GDP Growth: A Mixed Frequency Model Approach

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  • Franco, Ray John Gabriel
  • Mapa, Dennis S.

Abstract

Frequency mismatch has been a problem in econometrics for quite some time. Many monthly economic and financial indicators are normally aggregated to match quarterly macroeconomic series such as GDP when analysed in a statistical model. However, temporal aggregation, although widely accepted, is prone to information loss. To address this issue, mixed frequency modelling was employed by using state space models with time-varying parameters. Quarter-on-quarter growth rate of GDP estimates were first treated as a monthly series with missing observation. Using Kalman filter algorithm, state space models were estimated with eleven monthly economic indicators as exogenous variables. A one-step-ahead predicted value for GDP growth rates was generated and as more indicators were included in the equation, the predicted values came closer to the actual data. Further evaluation revealed that among the group competing models, using Consumer Price Index (CPI), growth rates of PSEi, exchange rate, real money supply, WPI and merchandise exports are the more important determinants of GDP growth and generated the most desirable forecasts (lower forecast errors).

Suggested Citation

  • Franco, Ray John Gabriel & Mapa, Dennis S., 2014. "The Dynamics of Inflation and GDP Growth: A Mixed Frequency Model Approach," MPRA Paper 55858, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:55858
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    References listed on IDEAS

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    More about this item

    Keywords

    Multi-frequency models; state space model; Kalman filter; GDP forecast;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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