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Forecasts of inflation for VAR models

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  • Roy H. Webb

Abstract

Why are forecasts of inflation from VAR models so much worse then their forecasts of real variables? This paper documents that relatively poor performance, and finds that the price equation of a VAR model fitted to U.S. postwar data is poorly specified. Statistical work by other authors has found that coefficients in such price equations may not be constant. Based on specific monetary actions, two changes in monetary policy regimes are proposed. Accounting for those two shifts yields significantly more accurate forecasts and lessens the evidence of misspecification.

Suggested Citation

  • Roy H. Webb, 1994. "Forecasts of inflation for VAR models," Working Paper 94-08, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:94-08
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    References listed on IDEAS

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    1. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
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    3. Thomas,Alex M., 2021. "Macroeconomics," Cambridge Books, Cambridge University Press, number 9781108731997, October.
    4. Balke, Nathan S. & Fomby, Thomas B., 1991. "Shifting trends, segmented trends, and infrequent permanent shocks," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 61-85, August.
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