FORECASTING INDONESIAN INFLATION WITHIN AN INFLATION-TARGETING FRAMEWORK: DO LARGE-SCALE MODELS PAY OFF?

Solikin Juhro and Bernard Njindan Iyke ()
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Bernard Njindan Iyke: Deakin University

Bulletin of Monetary Economics and Banking, 2019, vol. 22, issue 4, 423-436

Abstract: We examine the usefulness of large-scale inflation forecasting models in Indonesia within an inflation-targeting framework. Using a dynamic model averaging approach to address three issues the policymaker faces when forecasting inflation, namely, parameter, predictor, and model uncertainties, we show that large-scale models have significant payoffs. Our in-sample forecasts suggest that 60% of 15 exogenous predictors significantly forecast inflation, given a posterior inclusion probability cut-off of approximately 50%. We show that nearly 87% of the predictors can forecast inflation if we lower the cut-off to approximately 40%. Our out-of-sample forecasts suggest that large-scale inflation forecasting models have substantial forecasting power relative to simple models of inflation persistence at longer horizons.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:idn:journl:v:22:y:2019:i:4b:p:423-436

DOI: 10.21098/bemp.v22i4.1235

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