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Forecasting industry-level CPI and PPI inflation: Does exchange rate pass-through matter?

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  • Bhattacharya, Prasad S.
  • Thomakos, Dimitrios D.

Abstract

We show that incorporating the effects of exchange rate pass-through into a model can help in obtaining superior forecasts of domestic, industry-level inflation. Our analysis is based on a multivariate system of domestic inflation, import prices and exchange rates that incorporates restrictions from economic theory. These are restrictions on the transmission channels of the exchange rate pass-through to domestic prices, and are presented as testable hypotheses that lead to model reduction. We provide the results of various tests, including causality and prior restrictions, which support the underlying economic arguments and the model we use. The forecasting results for our model suggest that it has a superior performance overall, jointly producing more accurate forecasts of domestic inflation.

Suggested Citation

  • Bhattacharya, Prasad S. & Thomakos, Dimitrios D., 2008. "Forecasting industry-level CPI and PPI inflation: Does exchange rate pass-through matter?," International Journal of Forecasting, Elsevier, vol. 24(1), pages 134-150.
  • Handle: RePEc:eee:intfor:v:24:y:2008:i:1:p:134-150
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    Cited by:

    1. Šimpach Ondřej & Langhamrová Jitka, 2013. "Forecasting Future Salaries in the Czech Republic Using Stochastic Modelling," Business Systems Research, De Gruyter Open, vol. 4(2), pages 4-16, December.

    More about this item

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • 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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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