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Is Inflation Target Announced by Bank Indonesia the Most Accurate Inflation Forecast?

Author

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  • Faisal Rachman

    (School of Economics, the University of Edinburgh (MSc. Economics student))

Abstract

This article investigates whether following Bank Indonesia’s explicit inflation targets (forward-looking) is a more accurate method of predicting inflation rate in Indonesia than forecast methods utilizing past information of macroeconomic data (backward-looking). The analysis is conducted by performing naive, univariate, and multivariate time-series models with an out-of-sample forecast evaluation period of January 2014–December 2016. It is found that the backward-looking approach outperforms the forward-looking approach at all forecast horizons, indicating that Bank Indonesia still does not succeed to anchor inflation expectation towards the desired level.

Suggested Citation

  • Faisal Rachman, 2016. "Is Inflation Target Announced by Bank Indonesia the Most Accurate Inflation Forecast?," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 62, pages 98-120, August.
    • Handle: RePEc:lpe:efijnl:201609
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    References listed on IDEAS

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    Cited by:

    1. Pham, Thu Anh Thi & Nguyen, Thong Trung & Nasir, Muhammad Ali & Duc Huynh, Toan Luu, 2023. "Exchange rate pass-through: A comparative analysis of inflation targeting & non-targeting ASEAN-5 countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 158-167.

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    More about this item

    Keywords

    Inflation; Forward-Looking; Backward-Looking; ARMA; VAR;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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