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A two factor model to combine US inflation forecasts

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  • Pilar Poncela
  • Eva Senra

Abstract

The combination of individual forecasts is often a useful tool to improve forecast accuracy. The most commonly used technique for forecast combination is the mean, and it has frequently proved hard to surpass. This study considers factor analysis to combine US inflation forecasts showing that just one factor is not enough to beat the mean and that the second one is necessary. The first factor is usually a weighted mean of the variables and it can be interpreted as a consensus forecast, while the second factor generally provides the differences among the variables and, since the observations are forecasts, it may be related with the dispersion in forecasting expectations and, in a sense, with its uncertainty. Within this approach, the study also revisits Friedman's hypothesis relating the level of inflation with expectations uncertainty at the beginning of the twenty-first century.

Suggested Citation

  • Pilar Poncela & Eva Senra, 2006. "A two factor model to combine US inflation forecasts," Applied Economics, Taylor & Francis Journals, vol. 38(18), pages 2191-2197.
    • Handle: RePEc:taf:applec:v:38:y:2006:i:18:p:2191-2197
    DOI: 10.1080/00036840500427296
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    Cited by:

    1. Poncela, Pilar & Rodríguez, Julio & Sánchez-Mangas, Rocío & Senra, Eva, 2011. "Forecast combination through dimension reduction techniques," International Journal of Forecasting, Elsevier, vol. 27(2), pages 224-237.
    2. Christina Anderl & Guglielmo Maria Caporale, 2023. "Forecasting inflation with a zero lower bound or negative interest rates: Evidence from point and density forecasts," Manchester School, University of Manchester, vol. 91(3), pages 171-232, June.
    3. Pilar Poncela & Eva Senra, 2017. "Measuring uncertainty and assessing its predictive power in the euro area," Empirical Economics, Springer, vol. 53(1), pages 165-182, August.
    4. Poncela, Pilar & Guerrero, Víctor & Islas C., Alejandro & Rodríguez, Julio & Sánchez-Mangas, Rocío, 2014. "Mexico: Combining monthly inflation predictions from surveys," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.

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