The Role of Seasonality and Monetary Policy in Inflation Forecasting

July 1, 2006

Preview Citation

Format: Chicago

Francis Y Kumah. The Role of Seasonality and Monetary Policy in Inflation Forecasting, (USA: International Monetary Fund, 2006) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Adequate modeling of the seasonal structure of consumer prices is essential for inflation forecasting. This paper suggests a new econometric approach for jointly determining inflation forecasts and monetary policy stances, particularly where seasonal fluctuations of economic activity and prices are pronounced. In an application of the framework, the paper characterizes and investigates the stability of the seasonal pattern of consumer prices in the Kyrgyz Republic and estimates optimal money growth and implied exchange rate paths along with a jointly determined inflation forecast. The approach uses two broad specifications of an augmented error-correction model-with and without seasonal components. Findings from the paper confirm empirical superiority (in terms of information content and contributions to policymaking) of augmented error-correction models of inflation over single-equation, Box-Jenkins-type general autoregressive seasonal models. Simulations of the estimated errorcorrection models yield optimal monetary policy paths for achieving inflation targets and demonstrate the empirical significance of seasonality and monetary policy in inflation forecasting.

Subject: Consumer price indexes, Consumer prices, Economic forecasting, Exchange rates, Inflation

Keywords: Nominal exchange rate, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/175
Stock No:

WPIEA2006175
ISBN:

9781451864359
ISSN:

1018-5941

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