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Bilinear forecast risk assessment for non-systematic inflation: Theory and evidence

Author

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  • Wojciech Charemza
  • Yuriy Kharin
  • Vladislav Maevskiy

Abstract

The paper aims at assessing the forecast risk and the maximum admissible forecast horizon for the non-systematic component of inflation modeled autoregressively, where a distortion is caused by a simple first-order bilinear process. The concept of the guaranteed upper risk of forecasting and the d-admissible distortion level is defined here. In order to make this concept operational we propose a method of evaluation of the p-maximum admissible forecast risk, on the basis of the maximum likelihood estimates of the bilinear coefficient. It has been found that for the majority of developed countries (in terms of average GDP per capita) the maximum admissible forecast horizon is between 5 and 12 months, while for the poorer countries it is either shorter than 5 or longer than 12. There is also a negative correlation of the maximum admissible forecast horizon with the average GDP growth.

Suggested Citation

  • Wojciech Charemza & Yuriy Kharin & Vladislav Maevskiy, 2012. "Bilinear forecast risk assessment for non-systematic inflation: Theory and evidence," Discussion Papers in Economics 12/22, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:12/22
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    References listed on IDEAS

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    Cited by:

    1. Roberto Leon-Gonzalez & Fuyu Yang, 2017. "Bayesian inference and forecasting in the stationary bilinear model," Communications in Statistics - Theory and Methods, Taylor & Francis Journals, vol. 46(20), pages 10327-10347, October.

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    More about this item

    Keywords

    Forecasting; Inflation; Bilinear Processes;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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