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Comparative analysis of Mixed-Data Sampling (MIDAS) model compared to Lag-Llama model for inflation nowcasting

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  • Adam Bahelka
  • Harmen de Weerd

Abstract

Inflation is one of the most important economic indicators closely watched by both public institutions and private agents. This study compares the performance of a traditional econometric model, Mixed Data Sampling regression, with one of the newest developments from the field of Artificial Intelligence, a foundational time series forecasting model based on a Long short-term memory neural network called Lag-Llama, in their ability to nowcast the Harmonized Index of Consumer Prices in the Euro area. Two models were compared and assessed whether the Lag-Llama can outperform the MIDAS regression, ensuring that the MIDAS regression is evaluated under the best-case scenario using a dataset spanning from 2010 to 2022. The following metrics were used to evaluate the models: Mean Absolute Error (MAE), Mean Absolute Percentage Error (MAPE), Mean Squared Error (MSE), correlation with the target, R-squared and adjusted R-squared. The results show better performance of the pre-trained Lag-Llama across all metrics.

Suggested Citation

  • Adam Bahelka & Harmen de Weerd, 2024. "Comparative analysis of Mixed-Data Sampling (MIDAS) model compared to Lag-Llama model for inflation nowcasting," Papers 2407.08510, arXiv.org.
    • Handle: RePEc:arx:papers:2407.08510
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    References listed on IDEAS

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    6. Ghysels, Eric & Santa-Clara, Pedro & Valkanov, Rossen, 2004. "The MIDAS Touch: Mixed Data Sampling Regression Models," University of California at Los Angeles, Anderson Graduate School of Management qt9mf223rs, Anderson Graduate School of Management, UCLA.
    7. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    8. Vítor, Castro, 2011. "Can central banks' monetary policy be described by a linear (augmented) Taylor rule or by a nonlinear rule?," Journal of Financial Stability, Elsevier, vol. 7(4), pages 228-246, December.
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