Can Demography Improve Inflation Forecasts? The Case of Sweden

Mattias Bruér
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Mattias Bruér: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

No 2002:4, Working Paper Series from Uppsala University, Department of Economics

Abstract: Time series regressions indicate that age structure has significant forecasting power on Swedish inflation. The results agree with a Phillips-Okun framework, assuming that the demographic composition affects productivity. The relative age effects are also relatively well in accordance with what could be expected from life-cycle theory. In the forecasting exercise the age model outperforms the estimated benchmarks; i.e. two autoregressive models, an ARIMA and the 2 per cent forecast corresponding to the stipulated inflation target. The age model is also considerably better than the consensus forecasts and it is equal in merit with a general VAR model that has been used by the Riksbank (Bank of Sweden). We conclude that the source of information embedded in the age shares is something the Riksbank should consider when conducting monetary policy. When extending the forecasting horizon, the age model predicts a significant rise in the inflationary pressure after 2005 when the big baby boom cohort of the 1940s enters retirement.

Keywords: Inflation forecasting; Demography; Life-cycle hypothesis (search for similar items in EconPapers)
JEL-codes: E31 J10 J11 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2002-03-15
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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