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Forecasting inflation in Malaysia

  • Jarita Duasa

    (Department of Economics, Kuliyyah of Economics and Management Sciences, International Islamic University Malaysia, Kuala Lumpur, Malaysia)

  • Nursilah Ahmad

    (Fakulti Ekonomi and Muamalat, University Sains Islam Malaysia, Negeri Sembilan, Malaysia)

  • Mansor H. Ibrahim

    (Department of Economics, Faculty of Economics and Management, Universiti Putra Malaysia, Selangor Darul Ehsan, Malaysia)

  • Mohd Pisal Zainal

    (International Centre for Education in Islamic Finance (INCEIF), Kuala Lumpur, Malaysia)

This paper aims to identify the best indicator in forecasting inflation in Malaysia. In methodology, the study constructs a simple forecasting model that incorporates the indicator|variable using the vector error correction (VECM) model of quasi-tradable inflation index and selected indicators: commodity prices, financial indicators and economic activities. For each indicator, the forecasting horizon used is 24 months and the VECM model is applied for seven sample windows over sample periods starting with the first month of 1980 and ending with the 12th month of every 2 years from 1992 to 2004. The degree of independence of each indicator from inflation is tested by analyzing the variance decomposition of each indicator and Granger causality between each indicator and inflation. We propose that a simple model using an aggregation of indices improves the accuracy of inflation forecasts. The results support our hypothesis. Copyright © 2009 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.1154
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 29 (2010)
Issue (Month): 6 ()
Pages: 573-594

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Handle: RePEc:jof:jforec:v:29:y:2010:i:6:p:573-594
DOI: 10.1002/for.1154
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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  1. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  2. Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," CEPR Discussion Papers 1672, C.E.P.R. Discussion Papers.
  3. Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Center for International and Development Economics Research (CIDER) Working Papers 233607, University of California-Berkeley, Department of Economics.
  4. Rana, Pradumna B & Dowling, J Malcolm, Jr, 1985. "Inflationary Effects of Small but Continuous Changes in Effective Exchange Rates: Nine Asian LDCs," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 496-500, August.
  5. Stephen G. Cecchetti & Rita S. Chu & Charles Steindel, 2000. "The unreliability of inflation indicators," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 6(Apr).
  6. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The consumer price index as a measure of inflation," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 15-24.
  7. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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