Evaluating inflation forecast models for Poland: Openness matters, money does not (but its cost does)

Mukherjee, Deepraj and Kemme, David (2008): Evaluating inflation forecast models for Poland: Openness matters, money does not (but its cost does).

Abstract

Countries in which inflation targeting has been adopted require high quality inflation forecasts. The Polish National Bank adopted a variant of implicit inflation targeting and therefore the ability to forecast inflation is critically important to policy makers. Since the domestic price formation process is still evolving, medium term inflation forecasting is often difficult. Using quarterly data from 1995-2007, we estimate and evaluate three types of models for inflation forecasting: (1) output gap models, (2) models involving money, and (3) models which bring the foreign sector into the price formation process. We find that openness is significant in the price formation process and inflation targeting is associated with lower inflation. Traditional measures of forecast accuracy indicate that the simple price gap version of the P* model and the money demand model perform best of this group for medium term forecasting.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary policy, inflation, forecasting, models.
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications

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