The Combination of Forecasts: An Application of a Time-Varying Simple Weighting Method to Inflation Forecasts in Turkey

Abstract

We present a study on combining the forecasts from a time-series model and an econometric model in the context of the inflation rates of Turkey and propose a new weighting scheme, the time-varying simple weighting method. Our guiding principle for the deduction of this method is based on retaining the practicability and straightforwardness of simple averaging while avoiding the data-driven aspects of time-varying approaches. We further provide a topical and qualitative overview on the exhaustive literature of forecast combinations and apply our newly developed combination method to test for the prospective credibility of the inflation-targeting regime of the central bank of the Republic of Turkey.

Keywords: Forecast combination, Combination weights, Autoregressive Moving Average, Time Series, Forecast, Forecasting, Econometric modeling, Consumer Price Index, CPI, Inflation

JEL Classification: C32, C53, E37, E31