Business and Economics > Forecasting

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International Monetary Fund. Monetary and Capital Markets Department
The currency in circulation forecasting model presently used by the Central Bank of Jordan is aligned with international practices and provides a solid basis for liquidity management. The central bank uses an Auto Regressive Integrated Moving Average (ARIMA) model with many indicator variables to model binary seasonality and to capture special events. The ARIMA model is fitted on daily currency in circulation data using a standard maximum likelihood estimator. This ARIMA approach is aligned with the models traditionally used by central banks in emerging and middle-income countries.
Svetlana Vtyurina and Fahad Alturki
This paper attempts to explain short- and long-term dynamics of-and forecast-inflation in Tajikistan using the Vector Error Correction Model (VECM) and Autoregressive Moving Average Model (ARMA). By analyzing different transmission channels through the VECM, we were able to evaluate their relative dominance, magnitude, and speed of transition to the equilibrium price level, with the view of identifying those policy tools that will enhance the effectiveness of monetary policy. We found that excess supply of broad money is inflationary in both the short and long term. The dynamic analysis also demonstrates that the exchange rate and international inflation have a strong impact on local prices. Available monetary instruments, such as the refinancing rate, have proven to be ineffective. Therefore, the Tajik monetary authority could greatly benefit from enhancing its monetary instruments toolkit, including by developing the interest rate channel, to improve its monetary policy execution and to achieve stable inflationary conditions.
Mr. Kenji Moriyama and Abdul Naseer
This paper forecasts inflation in Sudan following two methodologies: the Autoregressive Moving Average (ARMA) model and by looking at the leading indicators of inflation. The estimated ARMA model remarkably tracks the actual inflation during the sample period. The Granger causality test suggests that private sector credit and world wheat prices are the leading indicators explaining inflation in Sudan. Inflation forecasts based on both approaches suggest that inflationary pressures for 2009 and 2010 will be modest and that inflation will remain in single-digits, assuming that prudent macroeconomic policies are maintained.
Pär Österholm and Mr. Helge Berger
We use Bayesian estimation techniques to investigate whether money growth Granger-causes inflation in the United States. We test for Granger-causality out-of-sample and find, perhaps surprisingly given recent theoretical arguments, that including money growth in simple VAR models of inflation does systematically improve out-of-sample forecasting accuracy. This holds for a long forecasting sample 1960-2005, as well for more recent subperiods, including the Volcker and Greenspan eras. However, the contribution of money to inflation forecasting accuracy is quantitatively limited and tends to be smaller in recent subperiods, in particular in models that also include information on real GDP growth and interest rates.
Pär Österholm and Mr. Helge Berger
We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice.
Mr. Emil Stavrev
The paper evaluates the 24-month ahead inflation forecasting performance of various indicators of underlying inflation and structural models. The inflation forecast errors resulting from model misspecification are larger than the errors resulting from forecasting of exogenous variables. Also, measures derived using the generalized dynamic factor model (GDFM) overperform other measures over the monetary policy horizon and are leading indicators of headline inflation. Trimmed means, although weaker than GDFM indicators, have good forecasting performance, while indicators by permanent exclusion underperform but provide useful information about short-term dynamics. The forecasting performance of theoretically-founded models that relate monetary aggregates, the output gap, and inflation improves with the time horizon but generally falls short of that of the GDFM. A composite measure of underlying inflation, derived by averaging the statistical indicators and the model-based estimates, improves forecast accuracy by eliminating bias and offers valuable insight about the distribution of risks.
International Monetary Fund
This paper presents three empirical approaches to forecasting inflation in Pakistan. The preferred approach is a leading indicators model in which broad money growth and private sector credit growth help forecast inflation. A univariate approach also yields reasonable forecasts, but seems less suited to capturing turning points. A vector autoregressive (VAR) model illustrates how monetary developments can be described by a Phillips-curve type relationship. We deal with potential parameter instability on account of fundamental changes in Pakistan's economic system by restricting our sample to more recent observations. Gregorian and Islamic calendar seasonality are addressed by using 12-month moving averages.
Mr. Willy A Hoffmaister
The revised Bank of Korea Act states that the primary goal of monetary policy is price stability, suggesting that monetary policy will move toward an inflation-targeting framework. The paper explores some of the practical aspects of this move, including such issues as the predictability of inflation, the definition of the price index, the inflation target’s time horizon, and the width of the inflation-target bands. On balance, the empirical evidence suggests that Korea is likely to be successful in adopting an inflation-targeting framework over the medium term.
Ms. G. C. Lim and Guy Debelle
Monetary policy in the Philippines has had multiple objectives. Moreover, shifts in money demand and the money multiplier have made base money a less reliable anchor for monetary policy. Hence, on present policies, a steady reduction in inflation is not assured, and changes to the monetary policy framework should be considered. This paper reviews the benefits as well as the constraints of an inflation targeting framework and the necessary preconditions--both in terms of the institutional infrastructure and the appropriate inflation target--for its successful implementation, including the ability to forecast inflation reasonably well over policy-relevant time horizons.