Inflation Forecasting and the Distribution of Price Changes

Sartaj Rasool Rather (), Sunil Paul and S. Raja Sethu Durai ()
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S. Raja Sethu Durai: Madras School of Economics

Working Papers from Madras School of Economics,Chennai,India

Abstract: This study shows that replacing the traditional measure of asymmetry that is skewness in the inflation forecasting model with an alternative asymmetry measure that captures the joint influence of both skewness and variance on inflation significantly improves the forecast at various horizons. The empirical evidence suggests that it is more appropriate to use such measure of asymmetry in inflation forecast model as it has edge over simple measure of skewness in predicting inflation. These findings are consistent with the prediction of menu cost model that the variance of cross sectional distribution of relative price changes amplifies the impact of skewness on inflation.

Keywords: skewness; relative price changes; asymmetry; inflation forecasting (search for similar items in EconPapers)
JEL-codes: E30 E31 E52 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2015-03
New Economics Papers: this item is included in nep-cba, nep-for and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Inflation forecasting and the distribution of price changes (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:mad:wpaper:2015-099

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