New Perspectives on Forecasting Inflation in Emerging Market Economies: An Empirical Assessment

58 Pages Posted: 15 Jun 2018 Last revised: 29 Apr 2020

See all articles by Roberto Duncan

Roberto Duncan

Ohio University - Department of Economics

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Date Written: January, 2018

Abstract

We use a broad-range set of inflation models and pseudo out-of-sample forecasts to assess their predictive ability among 14 emerging market economies (EMEs) at different horizons (1 to 12 quarters ahead) with quarterly data over the period 1980Q1-2016Q4. We find, in general, that a simple arithmetic average of the current and three previous observations (the RW-AO model) consistently outperforms its standard competitors - based on the root mean squared prediction error (RMSPE) and on the accuracy in predicting the direction of change. These include conventional models based on domestic factors, existing open-economy Phillips curve-based specifications, factor-augmented models, and time-varying parameter models. Often, the RMSPE and directional accuracy gains of the RW-AO model are shown to be statistically significant. Our results are robust to forecast combinations, intercept corrections, alternative transformations of the target variable, different lag structures, and additional tests of (conditional) predictability. We argue that the RW-AO model is successful among EMEs because it is a straightforward method to downweight later data, which is a useful strategy when there are unknown structural breaks and model misspecification.

JEL Classification: E31, F41, F42, F47

Suggested Citation

Duncan, Roberto and Martinez-Garcia, Enrique, New Perspectives on Forecasting Inflation in Emerging Market Economies: An Empirical Assessment (January, 2018). Available at SSRN: https://ssrn.com/abstract=3196450 or http://dx.doi.org/10.24149/gwp338

Roberto Duncan (Contact Author)

Ohio University - Department of Economics ( email )

Athens, OH 45701-2979
United States

HOME PAGE: http://www.ohio.edu/people/duncanr1/

Enrique Martinez-Garcia

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5262 (Phone)

HOME PAGE: http://sites.google.com/view/emgeconomics

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