Does Money Matter in Inflation Forecasting?

FRB of St. Louis Working Paper No. 2009-030B

39 Pages Posted: 26 Jun 2009 Last revised: 14 May 2010

See all articles by Jane M. Binner

Jane M. Binner

University of Birmingham - Department of Accounting and Finance

Peter Tino

affiliation not provided to SSRN

Jonathan Tepper

affiliation not provided to SSRN

Richard G. Anderson

Federal Reserve Bank of St. Louis - Research Division

Barry E. Jones

SUNY at Binghamton - Department of Economics

Graham Kendall

University of Nottingham

Date Written: April 1, 2010

Abstract

This paper provides the most fully comprehensive evidence to date on whether or not monetary aggregates are valuable for forecasting US inflation in the early to mid 2000s. We explore a wide range of different definitions of money, including different methods of aggregation and different collections of included monetary assets. In our forecasting experiment we use two non-linear techniques, namely, recurrent neural networks and kernel recursive least squares regression - techniques that are new to macroeconomics. Recurrent neural networks operate with potentially unbounded input memory, while the kernel regression technique is a finite memory predictor. The two methodologies compete to find the best fitting US inflation forecasting models and are then compared to forecasts from a naive random walk model. The best models were non-linear autoregressive models based on kernel methods. Our findings do not provide much support for the usefulness of monetary aggregates in forecasting inflation. Beyond its economic findings, our study is in the tradition of physicists’ long-standing interest in the interconnections among statistical mechanics, neural networks, and related nonparametric statistical methods, and suggests potential avenues of extension for such studies.

Keywords: Inflation, Monetary Aggregates, Recurrent Neural Networks, Kernel Methods

JEL Classification: E31, E41, E47, E51

Suggested Citation

Binner, Jane M. and Tino, Peter and Tepper, Jonathan and Anderson, Richard G. and Jones, Barry E. and Kendall, Graham, Does Money Matter in Inflation Forecasting? (April 1, 2010). FRB of St. Louis Working Paper No. 2009-030B, Available at SSRN: https://ssrn.com/abstract=1425738 or http://dx.doi.org/10.2139/ssrn.1425738

Jane M. Binner

University of Birmingham - Department of Accounting and Finance ( email )

Birmingham, B15 2TY
United Kingdom

Peter Tino

affiliation not provided to SSRN ( email )

Jonathan Tepper

affiliation not provided to SSRN ( email )

Richard G. Anderson (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Barry E. Jones

SUNY at Binghamton - Department of Economics ( email )

Binghamton, NY 13902-6000
United States

Graham Kendall

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
65
Abstract Views
851
rank
379,598
PlumX Metrics