The Role of Seasonality and Monetary Policy in Inflation Forecasting
IMF Working Papers, July 1, 2006
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- The Role of Seasonality and Monetary Policy in Inflation Forecasting
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Bibliographic details
- Authors: Francis Y Kumah
- Published: July 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451864359.001
Overview and objective
- Adequate modeling of the seasonal structure of consumer prices is essential for inflation forecasting.
- The paper proposes a new econometric approach for jointly determining inflation forecasts and monetary policy stances, particularly where seasonal fluctuations of economic activity and prices are pronounced.
- Application focus: characterization and investigation of the stability of the seasonal pattern of consumer prices in the Kyrgyz Republic, and estimation of optimal money growth and implied exchange rate paths along with a jointly determined inflation forecast.
Methodology
- Framework: two broad specifications of an augmented error-correction model — with and without seasonal components.
- Comparative models: augmented error-correction models versus single-equation, Box-Jenkins-type general autoregressive seasonal models.
- Simulations: estimated error-correction models are simulated to yield optimal monetary policy paths for achieving inflation targets.
Key findings
- Empirical superiority of augmented error-correction models of inflation over single-equation, Box-Jenkins-type general autoregressive seasonal models in terms of information content and contributions to policymaking.
- Seasonality and monetary policy are empirically significant in inflation forecasting.
- The proposed framework can jointly determine inflation forecasts and optimal monetary policy (money growth and implied exchange rate paths), demonstrated in the Kyrgyz Republic application.
Policy implications and recommendations
- Incorporate seasonal components explicitly in inflation-forecasting models when seasonal fluctuations of activity and prices are pronounced.
- Use augmented error-correction model specifications to improve information content for policymakers relative to single-equation seasonal autoregressive approaches.
- Employ model-based simulations to derive optimal monetary policy paths (money growth and implied exchange rate trajectories) that achieve specified inflation targets.
Content in this bundle
- 1. Augmented Error-Correction Mechanism