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Volume 65, Issue 1

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Forecasting Inflation with a Simple and Accurate Benchmark: The Case of the US and a Set of Inflation Targeting Countries

Medel, Carlos A.; Pincheira, Pablo M.

Year: 2015   Volume: 65   Issue: 1   Pages: 2-29

Abstract: We evaluate the ability of several univariate models to predict inflation in the US and in a number of inflation targeting countries at different forecasting horizons. We focus on forecasts coming from a family of ten seasonal models that we call the Driftless Extended Seasonal ARIMA (DESARIMA) family. Using out-of-sample Root Mean Squared Prediction Errors (RMSPE) we compare the forecasting accuracy of the DESARIMA family with that of traditional univariate time-series benchmarks available in the literature. Our results show that DESARIMA-based forecasts display lower RMSPE at short horizons for every single country, with the exception of one case. We obtain mixed results at longer horizons. In particular, when the family-median forecast is considered, in more than half of the countries our DESARIMA-based forecasts outperform the benchmarks at long horizons. Remarkably, the forecasting accuracy of our DESARIMA family is high in stable-inflation countries, for which the RMSPE is around 100 basis points when a prediction is made 24 and even 36 months ahead.

JEL classification: C22; C53; E31; E37; E47

Keywords: inflation forecasts, benchmark models, univariate time-series models, out-of-sample comparison

RePEc: http://ideas.repec.org/a/fau/fauart/v65y2015i1p2-29.html

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