A two-step dynamic factor modelling approach for forecasting inflation in small open economies

Uluc Aysun and Cardel Wright

Emerging Markets Review, 2024, vol. 62, issue C

Abstract: We build a dynamic factor model to forecast inflation in a small open economy. The model is estimated with both market and survey data, and a unique two-step methodology to incorporate exogenous factors. Estimations with market data provide a better fit for in-sample and out-of-sample values of inflation. More importantly, our model outperforms univariate and estimated DSGE models, the more common approaches to inflation forecasting that perform well for advanced economies. Our findings, therefore, suggest that a dynamic factor modelling approach for a small open economy such as Jamaica can be a good alternative to the preferred methods for forecasting inflation in advanced economies.

Keywords: Jamaica; Inflation expectations; Forecasting; Dynamic factor model; Survey data (search for similar items in EconPapers)
JEL-codes: E32 E44 F33 F44 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:62:y:2024:i:c:s1566014124000839

DOI: 10.1016/j.ememar.2024.101188

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