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Alternative bvar models for forecasting inflation

Author

Listed:
  • H. Heidari

    (Urmia University, Department of Economics, P.O.Box 165, Urmia, Iran)

Abstract

This paper investigates the use of different priors to improve the inflation forecasting performance of BVAR models with Litterman’s prior. A Quasi-Bayesian method, with several different priors, is applied to a VAR model of simulated data as well as to the Australian economy from 1978:Q2 to 2006:Q4. A novel feature with this paper is the use of g-prior in the BVAR models to alleviate poor estimation of drift parameters of Traditional BVAR models. Some results are as follows: (1) In the Quasi-Bayesian framework, BVAR models with Normal-Wishart prior provide the most accurate forecasts of Australian inflation; (2) Generally in the parsimonious models, the BVAR with g-prior performs better than BVAR with Litterman’s prior; (3) In simulated data, the BVAR model with g-prior produces more accurate forecasts of driftless variable in the long-run horizons (first and second year forecast horizons).

Suggested Citation

  • H. Heidari, 2011. "Alternative bvar models for forecasting inflation," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 61(1), pages 61-75, March.
    • Handle: RePEc:aka:aoecon:v:61:y:2011:i:1:p:61-75
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    More about this item

    Keywords

    inflation forecasting; Bayesian VAR models; g-prior; Australia;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: 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
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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