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Improving the predictability of commodity prices in US inflation: The role of coffee price

Afees Salisu (), Raymond Swaray () and Idris Adediran ()
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Raymond Swaray: Economics Subject Group, University of Hull Business, University of Hull, Cottingham Road, UK

No 41, Working Papers from Centre for Econometric and Allied Research, University of Ibadan

Abstract: In this paper, we set forth to answer the research question: can coffee price predict US inflation? Motivated by the importance of coffee to Americans and the significance of the coffee subsector to the US economy, we pursue three notable innovations. First, we augment the traditional Phillips curve model with coffee price as a predictor and show that the resulting model outperforms the traditional variant in both in-sample and out-of-sample predictability of US inflation. Second, we justify the need to account for the inherent statistical features in the predictor as well as make a case for the superiority of Westerlund and Narayan (WN) estimator especially in the in-sample predictive model. These answer the research question in the affirmative with strong evidence that coffee price indeed serves as a good predictor, along with economic activity, for US inflation. These further challenge the position of Stock and Watson (1999, 2007, 2008) and establish that economic models can outperform statistical models for forecasting inflation.

Keywords: OECD; US, Phillips curve, Coffee price, Inflation forecasts, Forecast evaluation (search for similar items in EconPapers)
JEL-codes: C53 E31 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr, nep-for and nep-mac
Date: 2018-01
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