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Short term Bayesian inflation forecasting for Tunisia

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  • Dahem, Ahlem

Abstract

In order to explain clearly inflation forecasting and the dynamic of Tunisian prices, this paper uses two econometric approaches, the Standard VAR and Bayesian VAR (BVAR), to assess three models for predicting inflation, the mark-up model, the monetary model and Phillips curve over the period 1990 Q1 – 2013 Q4. In order to compare predictions, an out-of-sample estimation was conducted. We used the structural break test of Bai & Perron (1998, 2003) and the RMSE criterion for both inflation indices: CPI and PPI. We found that the Bayesian VECM mark-up model is best suited to forecast inflation for Tunisia. Our conclusions corroborate the literature of Bayesian VAR forecasting. Our findings indicate that the models which incorporate more economic information outperform the benchmark autoregressive models (AR (1) and AR (2)). The results reveal that forecasting with the BVECM markup model leads to a reduction in forecasting error compared to the other models. The results of the study are relevant to decision-makers to predict inflation in the short- and long-terms in Tunisia and may help them adopt the appropriate strategies to contain inflation.

Suggested Citation

  • Dahem, Ahlem, 2015. "Short term Bayesian inflation forecasting for Tunisia," MPRA Paper 66702, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:66702
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    File URL: https://mpra.ub.uni-muenchen.de/66702/1/MPRA_paper_66702.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Bayesian VAR - Bayesian VECM - Inflation forecasting - Mark-up Model - Monetary Model - Phillips Curve;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • 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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