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Forecasting inflation rates with multi-level international dependence

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  • Ergemen, Yunus Emre

Abstract

We analyze inflation rates in high-income OECD countries employing a multi-level factor structure that is estimated based on canonical correlation analysis (CCA) and sequential least squares (SLS). We show that inflation has a global component, mainly driven by G7 countries, explaining 77% of the variation on average, and a local component that accounts for substantial comovements in a subset of the countries. We demonstrate that this combination of global and local components has outstanding predictive ability, and can improve forecast performance significantly over a global-component-only specification for different policy horizons thus constituting a new benchmark for inflation forecasting.

Suggested Citation

  • Ergemen, Yunus Emre, 2022. "Forecasting inflation rates with multi-level international dependence," Economics Letters, Elsevier, vol. 214(C).
    • Handle: RePEc:eee:ecolet:v:214:y:2022:i:c:s016517652200101x
    DOI: 10.1016/j.econlet.2022.110456
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    References listed on IDEAS

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    More about this item

    Keywords

    Factor models; Forecasting; Inflation; Multi-level structure; OECD countries;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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