Forecasting Inflation in Latin America with Core Measures
25 Pages Posted: 1 Aug 2017
Date Written: July 17, 2017
We explore the ability of core inflation to predict headline CPI annual inflation for a sample of 8 developing economies in Latin America during the period January 1995-May 2017. Our in-sample and out-of-sample results are roughly consistent in providing evidence of predictability in the great majority of our countries, although, as usual, a slightly stronger evidence of predictability comes from the in-sample analysis. The bulk of the out-of-sample evidence of predictability concentrates at the short horizons of 1 and 6 months. In contrast, at longer horizons of 12 and 24 months, we only find evidence of predictability for two countries: Chile and Colombia. This is both important and challenging, given that monetary authorities in our sample of developing countries are currently implementing or given steps toward the future implementation of inflation targeting regimes, which are heavily based on long run inflation forecasts.
Keywords: Inflation, Forecasting, Time Series, Monetary Policy, Core Inflation, Developing Countries
JEL Classification: E4,E17, E31, E37, E52, E58, F37, F41, F47, O1, O2, O11, O23, O54
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