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The macroeconomic and fiscal implications of inflation forecast errors

Harris Dellas (), Heather Gibson (), Stephen Hall () and George Tavlas ()

Journal of Economic Dynamics and Control, 2018, vol. 93, issue C, 203-217

Abstract: The accuracy of inflation forecasts has important implications for macroeconomic stability and real interest rates in economies with nominal rigidities. Erroneous forecasts destabilize output, undermine the conduct of monetary policy under inflation targeting and affect the cost of both short and long-term government borrowing. We propose a new method for forecasting inflation that combines individual forecasts using time-varying-coefficient estimation along with an alternative method based on neural nets. Its application to forecast data from the US and the euro area produces superior performance relative to the standard practice of using individual or linear combinations of individual forecasts, especially during periods marked by structural changes.

Keywords: Inflation forecasting; Nonlinear forecasts; Combining forecasts; Forecasting during structural change (search for similar items in EconPapers)
JEL-codes: E37 C53 C45 (search for similar items in EconPapers)
Date: 2018
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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