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- Title
Forecasting inflation with a zero lower bound or negative interest rates: Evidence from point and density forecasts.
- Authors
Anderl, Christina; Caporale, Guglielmo Maria
- Abstract
This paper investigates the predictive power of the shadow rate for the inflation rate in countries with a zero lower bound (the US, the UK and Canada) and in those with negative rates (Japan, the Euro Area and Switzerland). Using shadow rates obtained from two different models (the WX(3) and the KANSM(2) ones) and for different LB parameters we compare the out‐of‐sample forecasting performance of an inflation model including a shadow rate with a benchmark one excluding it. Both specifications are estimated by OLS (Ordinary Least Squares) and includes a range of macroeconomic factors computed by means of principal component analysis. Both point and density forecasts of the inflation rate are evaluated. The models including the shadow rate are found to outperform the benchmark ones according to both sets of criteria except in countries operating an official inflation targeting regime. Both types of shadow rates appear to produce equally accurate out‐of‐sample inflation forecasts.
- Subjects
INFLATION forecasting; PRICE inflation; PRINCIPAL components analysis; FORECASTING; EUROZONE; INTEREST rates
- Publication
Manchester School (1463-6786), 2023, Vol 91, Issue 3, p171
- ISSN
1463-6786
- Publication type
Article
- DOI
10.1111/manc.12434