The role of seasonality and monetary policy in inflation forecasting, Issues 2006-2175
International Monetary Fund, 2006 - Business & Economics - 25 pages
Adequate modeling of the seasonal structure of consumer prices is essential for inflation forecasting. This paper suggests a new econometric approach for jointly determining inflation forecasts and monetary policy stances, particularly where seasonal fluctuations of economic activity and prices are pronounced. In an application of the framework, the paper characterizes and investigates the stability of the seasonal pattern of consumer prices in the Kyrgyz Republic and estimates optimal money growth and implied exchange rate paths along with a jointly determined inflation forecast. The approach uses two broad specifications of an augmented error-correction model-with and without seasonal components. Findings from the paper confirm empirical superiority (in terms of information content and contributions to policymaking) of augmented error-correction models of inflation over single-equation, Box-Jenkins-type general autoregressive seasonal models. Simulations of the estimated error-correction models yield optimal monetary policy paths for achieving inflation targets and demonstrate the empirical significance of seasonality and monetary policy in inflation forecasting.
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The Role of Seasonality and Monetary Policy in Inflation Forecasting
Francis Y. Kumah
Limited preview - 2006
annual inflation Augmented EC model augmented error-correction model autoregressive process Broad Money Canova and Hansen cointegration consistent constant variance consumer price index Consumer Price Responses data generation process domestic currency dynamics of inflation elasticity of consumer Estimates In percent ex ante inflation exchange rate changes exchange rate depreciation exchange rate movements excludes seasonal forecast horizon forecast performance forecasting exercise forecasting inflation foreign prices Gold Prices headline inflation including seasonal dummies inflation dynamics inflation forecast inflation process Kyrgyz Republic model variants model with seasonal model without seasonal models of inflation monetary factors monetary policy stance money and exchange money supply moving average nominal exchange rate null hypothesis optimal monetary policy output process for exchange processes for money random walk process random walk specifications Recursive Root Mean Square Russian financial crisis seasonal components seasonal frequencies seasonal integration seasonal pattern seasonal structure seasonal unit roots seasonality in consumer shock significance of seasonality