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Evaluating Performance of Inflation Forecasting Models of Pakistan

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  • Hanif, Muhammad Nadim
  • Malik, Muhammad Jahanzeb

Abstract

This study compares the forecasting performance of various models of inflation for a developing country estimated over the period of last two decades. Performance is measured at different forecast horizons (up to 24 months ahead) and for different time periods when inflation is low, high and moderate (in the context of Pakistan economy). Performance is considered relative to the best amongst the three usually used forecast evaluation benchmarks – random walk, ARIMA and AR(1) models. We find forecasts from ARDL modeling and certain combinations of point forecasts better than the best benchmark model, the random walk model, as well as structural VAR and Bayesian VAR models for forecasting inflation for Pakistan. For low inflation regime, upper trimmed average of the point forecasts out performs any model based forecasting for short period of time. For longer period, use of an ARDL model is the best choice. For moderate inflation regime different ways to average various models’ point forecasts turn out to be the best for all inflation forecasting horizons. The most important case of high inflation regime was best forecasted by ARDL approach for all the periods up to 24 months ahead. In overall, we can say that forecasting performance of different approaches is state dependent for the case of developing countries, like Pakistan, where inflation is occasionally high and volatile.

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  • Hanif, Muhammad Nadim & Malik, Muhammad Jahanzeb, 2015. "Evaluating Performance of Inflation Forecasting Models of Pakistan," MPRA Paper 66843, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:66843
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    Cited by:

    1. Muhammad Nadim Hanif & Khurrum S. Mughal & Javed Iqbal, 2018. "A Thick ANN Model for Forecasting Inflation," SBP Working Paper Series 99, State Bank of Pakistan, Research Department.
    2. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2205-2221.
    3. Muhammad Omer & Omar Farooq Saqib, 2009. "Monetary Targeting in Pakistan: A Skeptical Note," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 5, pages 53-81.
    4. Khan, Safdar Ullah & Saqib, Omar Farooq, 2011. "Political instability and inflation in Pakistan," Journal of Asian Economics, Elsevier, vol. 22(6), pages 540-549.
    5. Muhammad Ejaz & Javed Iqbal, 2021. "Estimation and Forecasting of Industrial Production Index," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 26(1), pages 1-30, Jan-June.
    6. Jesus Felipe & J. S. L. McCombie & Kaukab Naqvi, 2010. "Is Pakistan's Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth," Oxford Development Studies, Taylor & Francis Journals, vol. 38(4), pages 477-496.
    7. Muhammad Jahanzeb Malik & Muhammad Nadim Hanif, 2019. "Learning from Errors While Forecasting Inflation: A Case for Intercept Correction," International Econometric Review (IER), Econometric Research Association, vol. 11(1), pages 24-38, April.
    8. Nyoni, Thabani, 2018. "Modeling and Forecasting Inflation in Zimbabwe: a Generalized Autoregressive Conditionally Heteroskedastic (GARCH) approach," MPRA Paper 88132, University Library of Munich, Germany.
    9. Khan, Rana Ejaz Ali & Gill, Abid Rashid, 2007. "Impact of Supply of Money on Food and General Price Indices: A Case of Pakistan," MPRA Paper 16293, University Library of Munich, Germany.
    10. Omer, Muhammad, 2009. "Stability of money demand function in Pakistan," MPRA Paper 35306, University Library of Munich, Germany.
    11. Aadil Nakhoda, 2014. "The Influence of Industry Financial Composition on the Exports from Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 10, pages 21-49.
    12. Fayyaz Hussain & Zafar Hayat, 2016. "Do Inflation Expectations Matter for Inflation Forecastability: Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 55(3), pages 211-225.
    13. Mahmood, Haroon & Rehman, Kashif-ur-, 2013. "An Analysis of Macroeconomic State and Prospects of Pakistan during Recent Global Financial Turmoil," MPRA Paper 49447, University Library of Munich, Germany.

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    More about this item

    Keywords

    Inflation; Forecast Evaluation; Random Walk model; AR(1) model; ARIMA model; ARDL model; Structural VAR model; Bayesian VAR model; Trimmed Average;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • 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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