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Finding Good Predictors for Inflation: A Bayesian Model Averaging Approach

  • Jacobson, Tor

    ()

    (Research Department, Central Bank of Sweden)

  • Karlsson, Sune

    ()

    (Stockholm School of Economics)

We consider a Bayesian Model Averaging approach for the purpose of forecasting Swedish consumer price index inflation using a large set of potential indicators, comprising some 80 quarterly time series covering a wide spectrum of Swedish economic activity. The paper demonstrates how to efficiently and systematically evaluate (almost) all possible models that these indicators in combination can give rise to. The results, in terms of out-of-sample-performance, suggest that Bayesian Model Averaging is a useful alternative to other forecasting procedures, in particular recognizing the flexibility by which new information can be incorporated.

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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 138.

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Length: 24 pages
Date of creation: 01 Aug 2002
Date of revision:
Publication status: Published in Journal of Forecasting, 2004, pages 479-496.
Handle: RePEc:hhs:rbnkwp:0138
Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
Web page: http://www.riksbank.com/
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  1. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
  2. Carmen Fernandez & E Ley & Mark F J Steel, 2004. "Benchmark priors for Bayesian models averaging," ESE Discussion Papers 66, Edinburgh School of Economics, University of Edinburgh.
  3. Min, C.K. & Zellner, A., 1992. ""Bayesian and Non-Bayesian Methods for Combining Models and Forecasts with Applications to Forecasting International Growth Rates"," Papers 90-92-23, California Irvine - School of Social Sciences.
  4. Smith, Michael & Kohn, Robert, 2000. "Nonparametric seemingly unrelated regression," Journal of Econometrics, Elsevier, vol. 98(2), pages 257-281, October.
  5. PALM, Franz C. & ZELLNER, Arnold, . "To Combine or not to Combine? Issues of Combining Forecasts," CORE Discussion Papers RP -1027, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583.
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