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The macroeconomic and fiscal implications of inflation forecast errors

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  • Dellas, Harris
  • Gibson, Heather D.
  • Hall, Stephen G.
  • Tavlas, George S.

Abstract

The accuracy of inflation forecasts has important implications for macroeconomic stability and real interest rates in economies with nominal rigidities. Erroneous forecasts destabilize output, undermine the conduct of monetary policy under inflation targeting and affect the cost of both short and long-term government borrowing. We propose a new method for forecasting inflation that combines individual forecasts using time-varying-coefficient estimation along with an alternative method based on neural nets. Its application to forecast data from the US and the euro area produces superior performance relative to the standard practice of using individual or linear combinations of individual forecasts, especially during periods marked by structural changes.

Suggested Citation

  • Dellas, Harris & Gibson, Heather D. & Hall, Stephen G. & Tavlas, George S., 2018. "The macroeconomic and fiscal implications of inflation forecast errors," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 203-217.
  • Handle: RePEc:eee:dyncon:v:93:y:2018:i:c:p:203-217
    DOI: 10.1016/j.jedc.2018.01.030
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation forecasting; Nonlinear forecasts; Combining forecasts; Forecasting during structural change;

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics

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