Analyzing the Effectiveness of a System of Equation Model in Comparison to Single Equation Models for Predicting General Price Level in Cambodia

Siphat Lim, Edman Flores and Casey Barnett
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Siphat Lim: CamEd Business School, Phnom Penh, Cambodia
Edman Flores: CamEd Business School, Phnom Penh, Cambodia
Casey Barnett: CamEd Business School, Phnom Penh, Cambodia

International Journal of Economics and Financial Issues, 2024, vol. 14, issue 5, 156-166

Abstract: The primary aim of this study is to evaluate the effectiveness of two different models in predicting Cambodia’s inflation rate: the SARIMAX model, a single equation model, and the VAR model, a system of equation model. The findings from both models indicate that foreign exchange and monetary aggregate are crucial variables in forecasting changes in the inflation rate. During the projected timeframe spanning from November 2023 to April 2024, the SARIMAX model predicted a mean monthly inflation of 0.005452%, while the VAR model forecasted a higher mean of 0.196017% for the previous 7 months. Notably, the SARIMAX model exhibited better accuracy in forecasting inflation rates compared to the VAR model, showcasing a lower RMSE of 1.06903 for SARIMAX, compared to 1.15166 for VAR. This suggests that the SARIMAX model provides more reliable and precise inflation rate predictions than the VAR model during the study period. The superior performance of the SARIMAX model in forecasting inflation rates highlights its effectiveness in capturing the complex dynamics between inflation, exchange rates, and monetary aggregates in the Cambodian economy. This finding has important implications for policymakers in developing appropriate monetary and exchange rate policies to maintain price stability and promote sustainable economic growth.

Keywords: Consumer Price Index; Foreign Exchange; Monetary Aggregate; SARIMAX Model; VAR Model (search for similar items in EconPapers)
JEL-codes: C32 C52 C53 E31 E37 E47 (search for similar items in EconPapers)
Date: 2024
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