PREDICTING INFLATION: DOES THE QUANTITY THEORY HELP? |
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| Authors: | LANCE J BACHMEIER NORMAN R SWANSON |
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| Institution: | Assistant Professor, Department of Economics, 327 Waters Hall, Kansas State University, Manhattan, KS 66502-4001. Phone 1-785-532-4578, Fax 1-785-537-6919, E-mail;Professor, Department of Economics, Rutgers University, 75 Hamilton Street, New Brunswick, NJ 08901. Phone 1-732-932-7432, Fax 1-732-932-7416, E-mail |
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| Abstract: | Various inflation forecasting models are compared for the period 1979–2003 using a simulated out-of-sample forecasting framework. Our findings are (1) M2 has marginal predictive content for inflation; (2) it is necessary to allow for the possibility that money, prices, and output are cointegrated; and (3) cointegration vector parameter estimation error is important when making out-of-sample forecasts. Consistent with previous work, we find a structural break in the early 1990s, but the break was easily detected and would not have affected out-of-sample inflation forecasts. Two Monte Carlo experiments that lend credence to our findings are also reported on.(JEL E31 , C32 ) |
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