The Usefulness of the Median CPI in Bayesian VARs Used for Macroeconomic Forecasting and Policy

Brent Meyer and Saeed Zaman

No 2016-13, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: In this paper we investigate the forecasting performance of the median Consumer Price Index (CPI) in a variety of Bayesian vector autoregressions (BVARs) that are often used for monetary policy. Until now, the use of trimmed-mean price statistics in forecasting inflation has often been relegated to simple univariate or Phillips curve approaches, thus limiting their usefulness in applications that require consistent forecasts of multiple macro variables. We find that inclusion of an extreme trimmed-mean measure?the median CPI?improves the forecasts of both core and headline inflation (CPI and personal consumption expenditures) across our set of monthly and quarterly BVARs. Although the inflation forecasting improvements are perhaps not surprising given the current literature on core inflation statistics, we also find that inclusion of the median CPI improves the forecasting accuracy of the central bank's primary instrument for monetary policy: the federal funds rate. We conclude with a few illustrative exercises that highlight the usefulness of using the median CPI.

Keywords: inflation forecasting; trimmed-mean estimators; Bayesian vector autoregressions; conditional forecasting (search for similar items in EconPapers)
JEL-codes: C11 E31 E37 E52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016-11-01
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Journal Article: The usefulness of the median CPI in Bayesian VARs used for macroeconomic forecasting and policy (2019)
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