It’s not just for inflation: The usefulness of the median CPI in BVAR forecasting

Brent Meyer and Saeed Zaman

No 1303, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: In this paper we investigate the forecasting performance of the median CPI in a variety of Bayesian VARs (BVARs) that are often used for monetary policy. Until now, the use of trimmed-mean price statistics in forecasting inflation has often been relegated to simple univariate or ?Philips-Curve? approaches, thus limiting their usefulness in applications that require consistent forecasts of multiple macro variables. We find that inclusion of an extreme trimmed-mean measure?the median CPI?significantly improves the forecasts of both headline and core CPI. across our wide-ranging set of BVARs. While the inflation forecasting improvements are perhaps not surprising given the current literature on core inflation statistics, we also find that inclusion of the median CPI improves the forecasting accuracy of the central bank?s primary instrument for monetary policy?the federal funds rate. We conclude with a few illustrative exercises that highlight the usefulness of using the median CPI.

Keywords: Bayesian statistical decision theory; Forecasting; Monetary policy; Simulation modeling (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1303

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