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Is Inflation Target Announced by Bank Indonesia the Most Accurate Inflation Forecast?

Author

Listed:
  • Faisal Rachman

    (School of Economics, the University of Edinburgh (MSc. Economics student))

Abstract

This article investigates whether following Bank Indonesia’s explicit inflation targets (forward-looking) is a more accurate method of predicting inflation rate in Indonesia than forecast methods utilizing past information of macroeconomic data (backward-looking). The analysis is conducted by performing naive, univariate, and multivariate time-series models with an out-of-sample forecast evaluation period of January 2014–December 2016. It is found that the backward-looking approach outperforms the forward-looking approach at all forecast horizons, indicating that Bank Indonesia still does not succeed to anchor inflation expectation towards the desired level.

Suggested Citation

  • Faisal Rachman, 2016. "Is Inflation Target Announced by Bank Indonesia the Most Accurate Inflation Forecast?," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 62, pages 98-120, August.
  • Handle: RePEc:lpe:efijnl:201609
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    References listed on IDEAS

    as
    1. Cukierman, Alex, 2008. "Central bank independence and monetary policymaking institutions -- Past, present and future," European Journal of Political Economy, Elsevier, vol. 24(4), pages 722-736, December.
    2. Marie Diron & Benoît Mojon, 2008. "Are inflation targets good inflation forecasts?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 33-45.
    3. Altug, Sumru & Çakmaklı, Cem, 2016. "Forecasting inflation using survey expectations and target inflation: Evidence for Brazil and Turkey," International Journal of Forecasting, Elsevier, vol. 32(1), pages 138-153.
    4. Cumby, Robert E & Huizinga, John, 1992. "Testing the Autocorrelation Structure of Disturbances in Ordinary Least Squares and Instrumental Variables Regressions," Econometrica, Econometric Society, vol. 60(1), pages 185-195, January.
    5. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    6. Takeshi Inoue & Yuki Toyoshima & Shigeyuki Hamori, 2013. "Inflation Targeting In South Korea, Indonesia, The Philippines And Thailand: The Impact On Business Cycle Synchronization Between Each Country And The World," World Scientific Book Chapters,in: Global Linkages and Economic Rebalancing in East Asia, chapter 5, pages 85-108 World Scientific Publishing Co. Pte. Ltd..
    7. Inoue, Takeshi & Toyoshima, Yuki & Hamori, Shigeyuki, 2012. "Inflation targeting in Korea, Indonesia, Thailand, and the Philippines : the impact on business cycle synchronization between each country and the world," IDE Discussion Papers 328, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    8. Siregar, Reza Y & Rajaguru, Gulasekaran, 2005. "Base Money and Exchange Rate: Sources of Inflation in Indonesia during the Post-1997 Financial Crisis," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 20, pages 185-215.
    9. Marcel Peter & Scott Roger & Geoffrey M Heenan, 2006. "Implementing Inflation Targeting; Institutional Arrangements, Target Design, and Communications," IMF Working Papers 06/278, International Monetary Fund.
    10. Ivanov Ventzislav & Kilian Lutz, 2005. "A Practitioner's Guide to Lag Order Selection For VAR Impulse Response Analysis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(1), pages 1-36, March.
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    More about this item

    Keywords

    Inflation; Forward-Looking; Backward-Looking; ARMA; VAR;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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