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Forecasting inflation and output growth with credit‐card‐augmented Divisia monetary aggregates

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  • William A. Barnett
  • Sohee Park

Abstract

This paper investigates the performance of the credit‐card‐augmented Divisia monetary aggregates in forecasting US inflation and output growth at the 12‐month horizon. We compute recursive and rolling out‐of‐sample forecasts using an autoregressive distributed lag model based on Divisia monetary aggregates. We use the three available versions of those monetary aggregate indices, including the original Divisia aggregates, the credit card‐augmented Divisia, and the credit‐card‐augmented Divisia inside money aggregates. The source of each is the Center for Financial Stability. We find that the smallest root mean square forecast errors are attained with the credit‐card‐augmented Divisia indices used as the forecast indicators. We also consider Bayesian vector autoregression for forecasting annual inflation and output growth.

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  • William A. Barnett & Sohee Park, 2023. "Forecasting inflation and output growth with credit‐card‐augmented Divisia monetary aggregates," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 42(2), pages 331-346, March.
    • Handle: RePEc:wly:jforec:v:42:y:2023:i:2:p:331-346
    DOI: 10.1002/for.2910
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    More about this item

    JEL classification:

    • 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
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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