New Methods for Forecasting Inflation, Applied to the US*. (3rd October 2012)

• Record Type: Journal Article
• Authors: Aron, Janine; Muellbauer, John
• Is Part Of: Oxford bulletin of economics and statistics. Volume 75:Number 5(2013:Oct.)
• Page Start: 637
• Page End: 661
• Publication Date: 2012-10-03
• Subjects: Economic history -- Periodicals; Great Britain -- Economic conditions -- Periodicals; 330.9
• DOI: 10.1111/j.1468-0084.2012.00728.x
• Languages: English
• ISSNs: 0305-9049

Abstract

<abstract abstract-type="main" xml:lang="en"> <title>Abstract</title> <p>Models for the 12‐month‐ahead US rate of inflation, measured by the chain‐weighted consumer expenditure deflator, are estimated for 1974–98 and subsequent pseudo out‐of‐sample forecasting performance is examined. Alternative forecasting approaches for different information sets are compared with benchmark univariate autoregressive models, and substantial out‐performance is demonstrated including against Stock and Watson's unobserved components‐stochastic volatility model. Three key ingredients to the out‐performance are: including equilibrium correction component terms in relative prices; introducing nonlinearities to proxy state‐dependence in the inflation process and replacing the information criterion, commonly used in VARs to select lag length, with a 'parsimonious longer lags' parameterization. Forecast pooling or averaging also improves forecast performance.</p> </abstract>