Forecasting Inflation in Latin America with Core Measures

Pincheira, Pablo and Selaive, Jorge and Nolazco, Jose Luis (2017): Forecasting Inflation in Latin America with Core Measures.

Abstract

We explore the ability of core inflation to predict headline CPI annual inflation for a sample of 8 developing economies in Latin America during the period January 1995-May 2017. Our in-sample and out-of-sample results are roughly consistent in providing evidence of predictability in the great majority of our countries, although, as usual, a slightly stronger evidence of predictability comes from the in-sample analysis. The bulk of the out-of-sample evidence of predictability concentrates at the short horizons of 1 and 6 months. In contrast, at longer horizons of 12 and 24 months, we only find evidence of predictability for two countries: Chile and Colombia. This is both important and challenging, given that monetary authorities in our sample of developing countries are currently implementing or given steps toward the future implementation of inflation targeting regimes, which are heavily based on long run inflation forecasts.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation, Forecasting, Time Series, Monetary Policy, Core Inflation, Developing Countries.
• Subjects: 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; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E47 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General; 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 > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F47 - Forecasting and Simulation: Models and Applications; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O23 - Fiscal and Monetary Policy in Development; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O54 - Latin America ; Caribbean

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