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Forecasting Swiss inflation using VAR models

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  • Caesar Lack
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    Abstract

    A procedure that has been used at the Swiss National Bank for selecting vector-autoregressive (VAR) models in order to forecast Swiss consumer price inflation is presented. In order to examine and improve the quality of the procedure, it is submitted to several modifications and the results are compared with one another. Combining forecasts substantially improves the quality of the forecasts. Models specified with respect to levels of variables are superior to those specified with respect to differences in variables. Bank loans and the monetary aggregate M3 are the most important variables for inflation forecasting. The optimized procedure reduces the root mean squared error (RMSE) of the inflation forecast to one third of the RMSE of a naive "no change" forecast over the period from 1987 to 2005.

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    File URL: http://www.snb.ch/n/mmr/reference/economic_studies_2006_02/source/economic_studies_2006_02.n.pdf
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    Bibliographic Info

    Paper provided by Swiss National Bank in its series Economic Studies with number 2006-02.

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    Length: 28 pages
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:snb:snbecs:2006-02

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    Related research

    Keywords: inflation forecasting; VAR models; model selection; model evaluation;

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    References

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    1. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986. "Forecasting and conditional projection using realistic prior distribution," Staff Report, Federal Reserve Bank of Minneapolis 93, Federal Reserve Bank of Minneapolis.
    2. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, Elsevier, vol. 5(4), pages 559-583.
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    Citations

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    Cited by:
    1. Oleg Kitov & Ivan Kitov, 2011. "Inflation and unemployment in Switzerland: from 1970 to 2050," Papers 1102.5405, arXiv.org.
    2. repec:onb:oenbwp:y::i:148:b:1 is not listed on IDEAS
    3. Öğünç, Fethi & Akdoğan, Kurmaş & Başer, Selen & Chadwick, Meltem Gülenay & Ertuğ, Dilara & Hülagü, Timur & Kösem, Sevim & Özmen, Mustafa Utku & Tekatlı, Necati, 2013. "Short-term inflation forecasting models for Turkey and a forecast combination analysis," Economic Modelling, Elsevier, Elsevier, vol. 33(C), pages 312-325.
    4. Johannes Mayr & Dirk Ulbricht, 2007. "VAR Model Averaging for Multi-Step Forecasting," Ifo Working Paper Series, Ifo Institute for Economic Research at the University of Munich Ifo Working Paper No. 48, Ifo Institute for Economic Research at the University of Munich.
    5. Rumler, Fabio & Valderrama, Maria Teresa, 2010. "Comparing the New Keynesian Phillips Curve with time series models to forecast inflation," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 21(2), pages 126-144, August.

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