Liew, Freddy (2012): Forecasting inflation in Asian economies. Forthcoming in:
Download (700Kb) | Preview
This paper surveys the recent literature on inflation forecasting and conducts an extensive empirical analysis on forecasting inflation in Singapore, Japan, South Korea and Hong Kong paying particular attention to whether the inflation-markup theory can help to forecast inflation. We first review the relative performance of different predictors in forecasting h-quarter ahead inflation using single equations. These models include the autoregressive model and bivariate Philips curve models. The predictors are selected from business activity, financial activity, trade activity, labour market, interest rate market, money market, exchange rate market and global commodity market variables. We then evaluate a vector autoregressive inflation-markup model against the single equation models to understand whether there is any gain in forecasting using the inflation-markup theory. The paper subsequently analyses the robustness of these results by examining different forecasting procedures in the presence of structural breaks. Empirical results suggest that inflation in Singapore, Hong Kong and South Korea is best predicted by financial and business activity variables. For Japan, global commodity variables provide the most predictive content for inflation. In general, monetary variables tend to perform poorly. These results hold even when structural break is taken into consideration. The vector autoregressive inflation-markup model does improve on single equation models as forecasting horizon increases and these gains are found to be significant for Japan and Korea.
|Item Type:||MPRA Paper|
|Original Title:||Forecasting inflation in Asian economies|
|Keywords:||Inflation, Markup, Forecasting, Asia, Structural Break|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods; Simulation Methods
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
|Depositing User:||Freddy Liew|
|Date Deposited:||20. Feb 2012 12:50|
|Last Modified:||18. Feb 2013 19:59|
Abeysinghe, T. and K. M. Choy (2007). The Singapore economy: an econonometric perspective, Taylor & Francis.
Arratibel, O., C. Kamps, et al. (2009). "Inflation forecasting in the new EU member states." ECB Working Paper No. 1015.
Atkeson, A. and L. E. Ohanian (2001). "Are Phillips curves useful for forecasting inflation?" Federal Reserve Bank of Minneapolis Quarterly Review 25(1): 2-11.
Banerjee, A., L. Cockerell, et al. (2001). "An I (2) analysis of inflation and the markup." Journal of Applied Econometrics 16(3): 221-240.
Banerjee, A., M. Marcellino, et al. (2005). "Leading Indicators for Euro‐area Inflation and GDP Growth." Oxford Bulletin of Economics and Statistics 67: 785-813.
Banerjee, A. and B. Russell (2001). "The relationship between the markup and inflation in the G7 economies and Australia." Review of Economics and Statistics 83(2): 377-384.
Banerjee, A. and B. Russell (2005). "Inflation and measures of the markup." Journal of Macroeconomics 27(2): 289-306.
Bekaert, G. and E. Engstrom (2010). "Inflation and the stock market: Understanding the "Fed Model" Journal of Monetary Economics 57(3): 278-294.
Benabou, R. (1992). "Inflation and markups." European Economic Review 36: 566-574.
Cecchetti, S. G., R. S. Chu, et al. (2001). The Unreliability of Inflation Indicators, Citeseer.
Chiu, P. (2003). "From Inflation to Deflation: A Novel Experience for Hong Kong." China Perspectives: 31-41.
Chong, Y. Y. and D. F. Hendry (1986). "Econometric evaluation of linear macro-economic models." The Review of Economic Studies 53(4): 671.
Chow, H. K. and K. M. Choy (2009). "Analysing and Forecasting Business Cycles in a Small Open Economy." Journal of Business Cycle Measurement and Analysis: 19.
Cockerell, L. and B. Russell (1995). Australian wage and price inflation: 1971-1994, Citeseer.
D'agostino, A. and P. Surico (2009). "Does global liquidity help to forecast US inflation?" Journal of Money, Credit and Banking 41(2‐3): 479-489.
De Brouwer, G. and N. R. Ericsson (1998). "Modeling inflation in Australia." Journal of Business & Economic Statistics: 433-449.
Diebold, F. X. and P. Pauly (1990). "The use of prior information in forecast combination." International Journal of forecasting 6(4): 503-508.
Fama, E. F. (1981). "Stock returns, real activity, inflation, and money." The American Economic Review 71(4): 545-565.
Fisher, I. (1933). "The debt-deflation theory of great depressions." Econometrica: Journal of the Econometric Society: 337-357.
Friedman, M. (1977). "Nobel lecture: inflation and unemployment." The Journal of Political Economy: 451-472. Goodhart, C. and B. Hofmann (2000). "Do asset prices help to predict consumer price inflation?" The Manchester School 68: 122-140.
Hendry, D. F. and M. P. Clements (2004). "Pooling of forecasts." The Econometrics Journal 7(1): 1-31.
Hendry, D. F. and K. Hubrich (2011). "Combining disaggregate forecasts or combining disaggregate information to forecast an aggregate." Journal of business and economic statistics 29(2): 216-227.
Hui, E. C. M. and S. Yue (2006). "Housing price bubbles in Hong Kong, Beijing and Shanghai: A comparative study." The Journal of Real Estate Finance and Economics 33(4): 299-327.
Ito, T. and K. Sato (2006). Exchange rate changes and inflation in post-crisis Asian economies: VAR analysis of the exchange rate pass-through, National Bureau of Economic Research.
Kim, S. and Y. C. Park (2006). "Inflation targeting in Korea: a model of success?" BIS papers 31: 140-164.
Klein, N. (2011). "South Africa: The Cyclical Behavior of the Markups and its Implications for Monetary Policy." IMF Working Papers.
Klein, N. (2011). "South Africa: The Cyclical Behavior of the Markups and its Implications for Monetary Policy."
Koop, G. and S. M. Potter (2007). "Estimation and forecasting in models with multiple breaks." Review of Economic Studies 74(3): 763-789.
LeBlanc, M. and M. D. Chinn (2004). "Do high oil prices presage inflation? The evidence from G-5 countries." Business Economics 34: 38-48.
Marcellino, M., J. H. Stock, et al. (2006). "A comparison of direct and iterated multistep AR methods for forecasting macroeconomic time series." Journal of Econometrics 135(1-2): 499-526.
Neiss, K. S. (2001). "The markup and inflation: evidence in OECD countries." Canadian Journal of Economics/Revue canadienne d'économique 34(2): 570-587.
Newbold, P. and D. I. Harvey (2002). "Forecast combination and encompassing." A companion to economic forecasting: 268-283.
Pesaran, M. H. and D. Pettenuzzo, et al. (2006). "Forecasting time series subject to multiple structural breaks." Review of Economic Studies 73(4): 1057-1084.
Pesaran, M. H. and A. Timmermann (1999). "Model instability and choice of observation window."
Pesaran, M. H. and A. Pick (2011). "Forecast combination across estimation windows." Journal of business and economic statistics 29(2): 307-318.
Pesaran, M. H., A. Pick, et al. (2011). "Optimal Forecasts in the Presence of Structural Breaks." Cambridge Working Papers in Economics.
Pesaran, M. H. and A. Timmermann (2004). "How costly is it to ignore breaks when forecasting the direction of a time series?" International Journal of forecasting 20(3): 411-425.
Phelps, E. and S. Winter (1970). "Optimal Price Policy under Atomistic Competition, Microeconomic Foundations of Employment and Inflation Theory."
Phelps, E. S. (1967). "Phillips curves, expectations of inflation and optimal unemployment over time." Economica: 254-281.
Polk, C., S. Thompson, et al. (2006). "Cross-sectional forecasts of the equity premium." Journal of Financial Economics 81(1): 101-141.
Romer, D. (1993). "Openness and inflation: theory and evidence." The Quarterly Journal of Economics 108(4): 869. Rotemberg, J. J. and M. Woodford (1991). Markups and the business cycle, MIT Press.
Russell, B. and A. Banerjee (2006). "A markup model for forecasting inflation for the euro area." Journal of Forecasting 25(7): 495-511.
Sekine, T. (2001). "Modeling and forecasting inflation in Japan." IMF Working Papers.
Stock, J. H. and M. W. Watson (1999). Forecasting inflation, National Bureau of Economic Research.
Stock, J. H. and M. W. Watson (2003). "Forecasting output and inflation: The role of asset prices." Journal of Economic Literature 41(3): 788-829.
Stock, J. H. and M. W. Watson (2006). "Forecasting with many predictors." Handbook of economic forecasting 1: 515-554.
Timmermann, A. (2006). Forecast combination, Handbook of Economic Forecasting.