Colombian inflation forecast using Long Short-Term Memory approach

Julián Alonso Cárdenas-Cárdenas, Deicy J. Cristiano-Botia and Nicolás Martínez-Cortés

Borradores de Economia from Banco de la Republica de Colombia

Abstract: We use Long Short Term Memory (LSTM) neural networks, a deep learning technique, to forecast Colombian headline inflation one year ahead through two approaches. The first one uses only information from the target variable, while the second one incorporates additional information from some relevant variables. We employ sample rolling to the traditional neuronal network construction process, selecting the hyperparameters with criteria for minimizing the forecast error. Our results show a better forecasting capacity of the network with information from additional variables, surpassing both the other LSTM application and ARIMA models optimized for forecasting (with and without explanatory variables). This improvement in forecasting accuracy is most pronounced over longer time horizons, specifically from the seventh month onwards. **** RESUMEN: A través de dos enfoques utilizamos redes neuronales Long Short-Term Memory (LSTM), una técnica de aprendizaje profundo, para pronosticar la inflación en Colombia con un horizonte de doce meses. El primer enfoque emplea solo información de la variable objetivo, la inflación, mientras que el segundo incorpora información adicional proveniente de algunas variables relevantes. Utilizamos rolling sample dentro del proceso tradicional de construcción de las redes neuronales, seleccionando los hiperparámetros con criterios de minimización del error de pronóstico. Nuestros resultados muestran una mejor capacidad de pronóstico de la red bajo el segundo enfoque, superando al primer enfoque y a modelos ARIMA optimizados para pronóstico (con y sin variables explicativas). Esta mejora en la capacidad de pronóstico es más pronunciada en horizontes más largos, específicamente entre el séptimo y doceavo mes.

Keywords: Deep learning; Long Short Term Memory neural networks; forecast; inflation; Aprendizaje profundo; redes neuronales Long Short-Term Memory; pronóstico; inflación (search for similar items in EconPapers)
JEL-codes: C45 C51 C52 C53 C61 E37 (search for similar items in EconPapers)
Pages: 26
Date: 2023-06
New Economics Papers: this item is included in nep-big, nep-cmp and nep-for
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https://doi.org/10.32468/be.1241

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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:1241

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