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Evaluating the Performance of Inflation Forecasting Models of Pakistan

Author

Listed:
  • Muhammad Nadim Hanif

    ()

  • Muhammad Jahanzeb Malik

    () (State Bank of Pakistan)

Abstract

This study compares forecasting performance of various models of inflation for a developing country estimated over the period of last two decades. Performance is measured at different forecast horizons (up to 24 months ahead) and for different time periods when inflation is low, high and moderate (in the context of Pakistan economy). Performance is considered relative to the best amongst the three usually used forecast evaluation benchmarks – random walk, ARIMA and AR(1) models. We find forecasts from ARDL modeling and certain combinations of point forecasts better than the best benchmark model, the random walk model, as well as structural VAR and Bayesian VAR models for forecasting inflation for Pakistan. For low inflation regime, upper trimmed average of the point forecasts out performs any model based forecasting for short period of time. For longer period, use of an ARDL model is the best choice. For moderate inflation regime different ways to average various models’ point forecasts turn out to be the best for all inflation forecasting horizons. The most important case of high inflation regime was best forecasted by ARDL approach for all the periods up to 24 months ahead. In overall, we can say that forecasting performance of different approaches is state dependent in the case of developing countries, like Pakistan, where inflation is occasionally high and volatile.

Suggested Citation

  • Muhammad Nadim Hanif & Muhammad Jahanzeb Malik, 2015. "Evaluating the Performance of Inflation Forecasting Models of Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 11, pages 43-78.
  • Handle: RePEc:sbp:journl:66
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    References listed on IDEAS

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    Cited by:

    1. Muhammad Nadim Hanif & Khurrum S. Mughal & Javed Iqbal, 2018. "A Thick ANN Model for Forecasting Inflation," SBP Working Paper Series 99, State Bank of Pakistan, Research Department.
    2. Muhammad Omer & Omar Farooq Saqib, 2009. "Monetary Targeting in Pakistan: A Skeptical Note," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 5, pages 53-81.
    3. Jesus Felipe & J. S. L. McCombie & Kaukab Naqvi, 2010. "Is Pakistan's Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth," Oxford Development Studies, Taylor & Francis Journals, vol. 38(4), pages 477-496.
    4. repec:erh:journl:v:11:y:2019:i:1:p:24-38 is not listed on IDEAS
    5. Khan, Safdar Ullah & Saqib, Omar Farooq, 2011. "Political instability and inflation in Pakistan," Journal of Asian Economics, Elsevier, vol. 22(6), pages 540-549.
    6. Khan, Rana Ejaz Ali & Gill, Abid Rashid, 2007. "Impact of Supply of Money on Food and General Price Indices: A Case of Pakistan," MPRA Paper 16293, University Library of Munich, Germany.
    7. Omer, Muhammad, 2009. "Stability of money demand function in Pakistan," MPRA Paper 35306, University Library of Munich, Germany.
    8. Aadil Nakhoda, 2014. "The Influence of Industry Financial Composition on the Exports from Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 10, pages 21-49.
    9. repec:pid:journl:v:55:y:2016:i:3:p:211-225 is not listed on IDEAS
    10. Mahmood, Haroon & Rehman, Kashif-ur-, 2013. "An Analysis of Macroeconomic State and Prospects of Pakistan during Recent Global Financial Turmoil," MPRA Paper 49447, University Library of Munich, Germany.
    11. Nyoni, Thabani, 2018. "Modeling and Forecasting Inflation in Zimbabwe: a Generalized Autoregressive Conditionally Heteroskedastic (GARCH) approach," MPRA Paper 88132, University Library of Munich, Germany.

    More about this item

    Keywords

    Inflation; Forecast evaluation; Random walk model; AR(1) model; ARIMA model; ARDL model; Structural VAR model; Bayesian VAR model; Trimmed average.;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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