Forecasting inflation in Mongolia: A dynamic model averaging approach

Doojav, Gan-Ochir and Luvsannyam, Davaajargal (2017): Forecasting inflation in Mongolia: A dynamic model averaging approach.

Abstract

This paper investigates the use of DMA approach for identifying good inflation predictors and forecasting inflation in Mongolia, one of the most commodity dependent economies, using dynamic model averaging (DMA). The DMA approach allows for both set of predictors for inflation and marginal effects of predictors to change over time. Our empirical work resulted in several novel in findings. First, external variables (i.e., China’s growth, China’s inflation, change in oil price) play important role in forecasting inflation and change considerably over time and over forecast horizons. Second, among domestic variables, wage inflation and M2 growth are currently the best predictors for short and longer forecast horizons. Third, the use of DMA lead to substantial improvements in forecast performance, and DMA (2,15) with the chosen forgetting factors is the best performer in predicting inflation for Mongolia.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation, Dynamic Model Averaging, Time-Varying Parameter, Forecasting
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; 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; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications

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