Forecasting annual inflation in Suriname

Gavin Ooft,Sailesh Bhaghoe,Philip Hans Franses

doi:10.1016/j.intfin.2021.101357

Abstract

For many countries, statistical information on macroeconomic variables is not abundant and, hence, creating forecasts for a key variable like inflation can be cumbersome. This paper addresses the creation of current year forecasts from a MIDAS regression for annual inflation rates in Suriname where monthly inflation rates are the explanatory variables, and where the latter are only available for one and a half decade. The constructed model associates with a hybrid New-Keynesian Philips curve (NKPC). Specific focus is given to the forecast accuracy in the high inflation period in 2016–2017. The forecasts became very accurate when the models included data from May onwards. A particular parameter restriction was also useful to improve forecast accuracy.

Highlights

For macroeconomic policy it is helpful to have reliable forecasts for key variables like real Gross Domestic Product growth, unemployment and inflation
One possible avenue may be to consider so-called MIDAS regression models. These are models that connect for example annual inflation rates with explanatory variables that are observed at a higher frequency, like months
We show that this model matches with a version of the Hybrid New-Keynesian Phillips Curve (HNKPC), where the forward looking behavior of agents is captured by the incoming monthly inflation rates

Summary

Introduction

For macroeconomic policy it is helpful to have reliable forecasts for key variables like real Gross Domestic Product growth, unemployment and inflation. One possible avenue may be to consider so-called MIDAS regression models These are models that connect for example annual inflation rates with explanatory variables that are observed at a higher frequency, like months. In this paper we consider the case of Suriname (in South America), where we rely on a particular inflation forecasting model, where the input is again inflation but observed at the monthly level. We show that this model matches with a version of the Hybrid New-Keynesian Phillips Curve (HNKPC), where the forward looking behavior of agents is captured by the incoming monthly inflation rates.

Background

Results

Conclusion