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New methods for forecasting inflation, applied to the US

  • Aron, Janine
  • Muellbauer, John

Models for the twelve-month-ahead US rate of inflation, measured by the chain weighted consumer expenditure deflator, are estimated for 1974-99 and subsequent pseudo out-of-sample forecasting performance is examined. Alternative forecasting approaches for different information sets are compared with benchmark univariate autoregressive models, and substantial out-performance is demonstrated. Three key ingredients to the out-performance are: including equilibrium correction terms in relative prices; introducing non-linearities to proxy state dependence in the inflation process; and replacing the information criterion, commonly used in VARs to select lag length, with a ‘parsimonious longer lags’ (PLL) parameterisation. Forecast pooling or averaging also improves forecast performance.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7877.

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Date of creation: Jun 2010
Date of revision:
Handle: RePEc:cpr:ceprdp:7877
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