Do Macro Variables, Asset Markets or Surveys Forecast Inflation Better?
55 Pages Posted: 9 Aug 2005
Date Written: July 26, 2005
Surveys do! We examine the forecasting power of four alternative methods of forecasting U.S. inflation out-of-sample: time series ARIMA models; regressions using real activity measures motivated from the Phillips curve; term structure models that include linear, non-linear, and arbitrage-free specifications; and survey-based measures. We also investigate several optimal methods of combining forecasts. Our results show that surveys outperform the other forecasting methods and that the term structure specifications perform relatively poorly. We find little evidence that combining forecasts using means or medians, or using optimal weights with prior information produces superior forecasts to survey information alone. When combining forecasts, the data consistently places the highest weights on survey information.
Keywords: ARIMA, Phillips curve, forecasting, term structure models
JEL Classification: E31, E37, E43, E44
Suggested Citation: Suggested Citation