Forecasting Inflation Using Commodity Price Aggregates

48 Pages Posted: 1 Oct 2011  

Yu-Chin Chen

University of Washington - Department of Economics

Stephen J. Turnovsky

University of Washington - Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Eric Zivot

University of Washington - Department of Economics

Date Written: September 28, 2011

Abstract

This paper shows that for five small commodity-exporting countries that have adopted inflation targeting monetary policies, world commodity price aggregates have predictive power for their CPI and PPI inflation, particularly once possible structural breaks are taken into account. This conclusion is robust to using either disaggregated or aggregated commodity price indexes (although the former perform better), the currency denomination of the commodity prices, and to using mixed-frequency data. In pseudo out-of-sample forecasting, commodity indexes outperform the random walk and AR processes, although the improvements over the latter are sometimes modest.

Keywords: commodity prices, inflation forecasts, inflation targeting

JEL Classification: C53, E61, F31, F47

Suggested Citation

Chen, Yu-Chin and Turnovsky, Stephen J. and Zivot, Eric, Forecasting Inflation Using Commodity Price Aggregates (September 28, 2011). Available at SSRN: https://ssrn.com/abstract=1935065 or http://dx.doi.org/10.2139/ssrn.1935065

Yu-Chin Chen (Contact Author)

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States
206-543-6197 (Phone)

HOME PAGE: http://faculty.washington.edu/yuchin

Stephen J. Turnovsky

University of Washington - Institute for Economic Research ( email )

Seattle, WA 98195
United States
206-685-8028 (Phone)
206-543-5955 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Eric W. Zivot

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States
206-543-6715 (Phone)
206-685-7477 (Fax)

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