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A Statistical Forecasting Method for Inflation Forecasting: Hitting Every Vector Autoregression and Forecasting under Model Uncertainty

  • Fujiwara, Ippei

    (Bank of Japan)

  • Koga, Maiko

    (Bank of Japan)

Typically, when conducting econometric forecasting, estimation is carried out on a forecasting model that is built upon some assumed economic structure. However, such techniques cannot avoid running into the possibility of misspecification, which will occur should there be some error in the assumptions underlying this economic structure. In this paper, in which we concentrate upon inflation forecasting, we present a method of hitting every vector autoregression (VAR) and forecasting under model uncertainty (HEVAR/FMU) that stresses statistical relationships among time-series data, and that makes no structural assumptions, other than to set up the underlying variables. Use of this HEVAR/FMU, in addition to establishing a more objective setting and enabling us to produce forecasts that take uncertainty into account, gives better results when forecasting qualitative movements in inflation. Therefore, we can state that the HEVAR/FMU can also play a valuable role in providing a cross-check for forecasts produced using such structural-type models.

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Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 22 (2004)
Issue (Month): 1 (March)
Pages: 123-142

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Handle: RePEc:ime:imemes:v:22:y:2004:i:1:p:123-142
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  1. Melick, William R. & Thomas, Charles P., 1997. "Recovering an Asset's Implied PDF from Option Prices: An Application to Crude Oil during the Gulf Crisis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 91-115, March.
  2. Krolzig, Hans-Martin & Hendry, David F., 2001. "Computer automation of general-to-specific model selection procedures," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 831-866, June.
  3. n/a, 2001. "A Comparison of Personal Sector Saving Rates in the UK, US and Italy," NIESR Discussion Papers 150, National Institute of Economic and Social Research.
  4. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
  5. Pesaran, M.H. & Timmermann, A., 1990. "A Simple, Non-Parametric Test Of Predictive Performance," Cambridge Working Papers in Economics 9021, Faculty of Economics, University of Cambridge.
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