IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Does money matter in inflation forecasting?

  • Jane M. Binner
  • Peter Tino
  • Jonathan Tepper
  • Richard G. Anderson
  • Barry Jones
  • Graham Kendall

This paper provides the most fully comprehensive evidence to date on whether or not monetary aggregates are valuable for forecasting US inflation in the early to mid 2000s. We explore a wide range of different definitions of money, including different methods of aggregation and different collections of included monetary assets. In our forecasting experiment we use two non-linear techniques, namely, recurrent neural networks and kernel recursive least squares regression - techniques that are new to macroeconomics. Recurrent neural networks operate with potentially unbounded input memory, while the kernel regression technique is a finite memory predictor. The two methodologies compete to find the best fitting US inflation forecasting models and are then compared to forecasts from a naive random walk model. The best models were non-linear autoregressive models based on kernel methods. Our findings do not provide much support for the usefulness of monetary aggregates in forecasting inflation.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://research.stlouisfed.org/wp/2009/2009-030.pdf
Download Restriction: no

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2009-030.

as
in new window

Length:
Date of creation: 2009
Date of revision:
Handle: RePEc:fip:fedlwp:2009-030
Contact details of provider: Postal: P.O. Box 442, St. Louis, MO 63166
Fax: (314)444-8753
Web page: http://www.stlouisfed.org/

More information through EDIRC

Order Information: Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Andrew Ang & Monika Piazzesi & Min Wei, 2004. "What Does the Yield Curve Tell us about GDP Growth?," NBER Working Papers 10672, National Bureau of Economic Research, Inc.
  2. Elger, Thomas & Jones, Barry E. & Nilsson, Birger, 2006. "Forecasting with Monetary Aggregates: Recent Evidence for the United States," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 428-446.
  3. Drake, L. & Mullineux, A., 1995. "One Divisa Money for Europe?," Discussion Papers 95-04, Department of Economics, University of Birmingham.
  4. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, 02.
  5. Emi Nakamura, 2008. "Pass-Through in Retail and Wholesale," NBER Working Papers 13965, National Bureau of Economic Research, Inc.
  6. Berument, Hakan & Yuksel, Ebru, 2007. "Effects of adopting inflation targeting regimes on inflation variability," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 375(1), pages 265-273.
  7. Jones, Barry E. & Dutkowsky, Donald H. & Elger, Thomas, 2005. "Sweep programs and optimal monetary aggregation," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 483-508, February.
  8. Moshiri, Saeed & Cameron, Norman E & Scuse, David, 1999. "Static, Dynamic, and Hybrid Neural Networks in Forecasting Inflation," Computational Economics, Society for Computational Economics, vol. 14(3), pages 219-35, December.
  9. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting "M" back in monetary policy," International Finance Discussion Papers 761, Board of Governors of the Federal Reserve System (U.S.).
  10. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, vol. 14(1), pages 11-48, September.
  11. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October.
  12. Leigh Drake & Terence C. Mills, 2005. "A New Empirically Weighted Monetary Aggregate for the United States," Economic Inquiry, Western Economic Association International, vol. 43(1), pages 138-157, January.
  13. Plerou, Vasiliki & Gopikrishnan, Parameswaran & Rosenow, Bernd & Amaral, Luis A.N. & Stanley, H.Eugene, 2000. "Econophysics: financial time series from a statistical physics point of view," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 279(1), pages 443-456.
  14. Diewert, W E, 1974. "Intertemporal Consumer Theory and the Demand for Durables," Econometrica, Econometric Society, vol. 42(3), pages 497-516, May.
  15. Hakan Berument & Ebru Yuksel, 2007. "Effects of Adopting Inflation Targeting Regimes on Inflation Variability," Working Papers 0702, Department of Economics, Bilkent University.
  16. Binner, Jane M. & Elger, C. Thomas & Nilsson, Birger & Tepper, Jonathan A., 2006. "Predictable non-linearities in U.S. inflation," Economics Letters, Elsevier, vol. 93(3), pages 323-328, December.
  17. Richard G. Anderson & Barry Jones & Travis Nesmith, 1996. "Monetary aggregation theory and statistical index numbers," Working Papers 1996-007, Federal Reserve Bank of St. Louis.
  18. Nelson, Edward, 2002. "Direct effects of base money on aggregate demand: theory and evidence," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 687-708, May.
  19. Barnett, William A, 1982. "The Optimal Level of Monetary Aggregation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 687-710, November.
  20. James H. Stock & Mark W. Watson, 2007. "Erratum to "Why Has U.S. Inflation Become Harder to Forecast?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
  21. Todd E. Clark, 1999. "A comparison of the CPI and the PCE price index," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 15-29.
  22. Jane M. Binner & Stuart I. Wattam, 2003. "A new composite leading indicator of inflation for the UK: a Kalman filter approach," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 5(2), pages 242-264.
  23. John B. Carlson & Dennis L. Hoffman & Benjamin D. Keen & Robert H. Rasche, 1999. "Results of a study of the stability of cointegrating relations comprised of broad monetary aggregates," Working Paper 9917, Federal Reserve Bank of Cleveland.
  24. Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
  25. Stefano Galluccio & Jean-Philippe Bouchaud & Marc Potters, 1998. "Rational Decisions, Random Matrices and Spin Glasses," Papers cond-mat/9801209, arXiv.org.
  26. Schunk, Donald L, 2001. "The Relative Forecasting Performance of the Divisia and Simple Sum Monetary Aggregates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 272-83, May.
  27. Thomas D. Simpson, 1980. "The redefined monetary aggregates," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 97-114.
  28. William A. Barnett & Shu Wu, 2005. "On user costs of risky monetary assets," Annals of Finance, Springer, vol. 1(1), pages 35-50, 01.
  29. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers.
  30. Andrews, Donald W.K., 1995. "Nonparametric Kernel Estimation for Semiparametric Models," Econometric Theory, Cambridge University Press, vol. 11(03), pages 560-586, June.
  31. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
  32. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  33. Zhang, Guoqiang & Eddy Patuwo, B. & Y. Hu, Michael, 1998. "Forecasting with artificial neural networks:: The state of the art," International Journal of Forecasting, Elsevier, vol. 14(1), pages 35-62, March.
  34. Galluccio, Stefano & Bouchaud, Jean-Philippe & Potters, Marc, 1998. "Rational decisions, random matrices and spin glasses," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 259(3), pages 449-456.
  35. Duca, John V. & VanHoose, David D., 2004. "Recent developments in understanding the demand for money," Journal of Economics and Business, Elsevier, vol. 56(4), pages 247-272.
  36. Leigh Drake & Andy Mullineux & Juda Agung, 1997. "One Divisia money for Europe?," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 775-786.
  37. Charles T. Carlstrom & Timothy S. Fuerst, 2004. "Thinking about Monetary Policy without Money," International Finance, Wiley Blackwell, vol. 7(2), pages 325-347, 07.
  38. Arturo Estrella, 2005. "Why Does the Yield Curve Predict Output and Inflation?," Economic Journal, Royal Economic Society, vol. 115(505), pages 722-744, 07.
  39. Barnett, William A & Fisher, Douglas & Serletis, Apostolos, 1992. "Consumer Theory and the Demand for Money," Journal of Economic Literature, American Economic Association, vol. 30(4), pages 2086-2119, December.
  40. Bachmeier, Lance & Leelahanon, Sittisak & Li, Qi, 2007. "Money Growth And Inflation In The United States," Macroeconomic Dynamics, Cambridge University Press, vol. 11(01), pages 113-127, February.
  41. Berument, Hakan & Nergiz Dincer, N., 2005. "Inflation and inflation uncertainty in the G-7 countries," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 348(C), pages 371-379.
  42. Richard G. Anderson & Robert H. Rasche, 2000. "Retail sweep programs and bank reserves, 1994--1999," Working Papers 2000-023, Federal Reserve Bank of St. Louis.
  43. Jane Binner & Rakesh Bissoondeeal & Andrew Mullineux, 2004. "A Composite Leading Indicator of the Inflation Cycle for the Euro Area," Money Macro and Finance (MMF) Research Group Conference 2004 24, Money Macro and Finance Research Group.
  44. Hulten, Charles R, 1973. "Divisia Index Numbers," Econometrica, Econometric Society, vol. 41(6), pages 1017-25, November.
  45. Vasiliki Plerou & Parameswaran Gopikrishnan & Bernd Rosenow & Luis A. Nunes Amaral & H. Eugene Stanley, 1999. "Universal and non-universal properties of cross-correlations in financial time series," Papers cond-mat/9902283, arXiv.org.
  46. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
  47. Donald H. Dutkowsky & Barry Z. Cynamon & Barry E. Jones, 2006. "U.S. Narrow Money for the Twenty-First Century," Economic Inquiry, Western Economic Association International, vol. 44(1), pages 142-152, January.
  48. J. M. Binner & A. Fielding & A. W. Mullineux, 1999. "Divisia money in a composite leading indicator of inflation," Applied Economics, Taylor & Francis Journals, vol. 31(8), pages 1021-1031.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2009-030. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.