<p>One approach that you might find useful/interesting would be Bayesian VARs.</p>

<p>An example of a Bayesian VAR being used to predict inflation can be found <a href="https://ideas.repec.org/a/eee/dyncon/v29y2005i11p1893-1925.html" rel="nofollow">here</a>.  In this paper, Tim Cogley, Sergui Morozov, and Tom Sargent motivate some methodology for Bayesian VARs and then compare their results to what the Bank of England uses in their "fan charts" (which they use to predict inflation).  Cogley and Sargent have two other papers on inflation that are related to this paper, "<a href="http://dx.doi.org/10.1016/j.red.2004.10.009" rel="nofollow">Drifts and Volatilities</a>" and "<a href="http://www.nber.org/chapters/c11068.pdf" rel="nofollow">Evolving Post-World War II U.S. Inflation Dynamics</a>."  This series of papers is a good expose on some of the theory of inflation and how to statistically approach it.</p>

<p>I believe @FooBar is right that most banks are using large-scale VARs (similar to the aforementioned) and New Keynesian models.  This isn't directly related to the question, but there is a literature on model averaging in which they can combine the forecasts of VARs and N-K models to provide a "more informed" (I use the phrase more informed here lightly but I do think the model averaging is helpful) prediction as to what will happen.  An example of such a paper can be found <a href="http://www.sciencedirect.com/science/article/pii/S0165188911000455" rel="nofollow">here</a></p>

CC BY-SA 3.0
2015-09-19T18:47:58.067Z
@cc7768 Nice information ;) could you give an example of a paper with model averaging of VAR and N-K models?
An old man in the sea.
CC BY-SA 3.0
2014-12-10T19:44:36.720Z
Thanks @cc7768 this is definitely useful and interesting information. However, it is about methods for prediction and not models. Whereas my question is about some general model(ignoring constants of course).
Zee
CC BY-SA 3.0
2014-12-09T02:15:22.140Z
2014-12-09T02:15:22.140Z
cc7768
<p>I am looking for some statistical models that are accepted to best predict inflation rates. Anything that is more complicated than linear model will be appreciated. Or even recommend books that discuss inflation predictions.</p>

<p>I would also be interested in models that could relate inflation to GDP(or some form of feature extracted from gdp).</p>

CC BY-SA 3.0
2016-03-08T00:09:13.863Z
@Zee Inflation prediction for which country / economic area? United States? Eurozone? A small open economy? This aspect will probably matter. Also, why would you want complexity greater than a linear model? Is this really desirable? More complicated models probably won't outperform simpler "robust" models. For inflation and output, there's an old paper by [Kuttner (1994)](https://ideas.repec.org/a/bes/jnlbes/v12y1994i3p361-68.html) - that contains a bivariate state-space model. There are lots of papers along these lines (also trivariate with unemployment, common cycles, etc.). Gordon Triangle.
Graeme Walsh
CC BY-SA 3.0
2014-12-08T16:00:47.863Z
Haha, good luck with that. There is no broad consensus whatsoever. On one front we have people who believe GDP and inflation are orthogonal, on the other we have a lot of people with a lot of ideas on what causes inflation - everyone with his own. I'm afraid in its current state, this question is too broad.
FooBar
CC BY-SA 3.0
2014-12-08T16:05:07.813Z
Ok what about the banks and all the interested entities on the marked. Surely they already use some models for prediction.
Zee
CC BY-SA 3.0
2014-12-08T16:08:32.317Z
Right, they do large-scale VARs and NK-models. Basically, they throw in anything they have and hope to increase $R^2$. However, this is not a practice that's is really accepted in academia. But, as you say, central banks gotta do something... So if you rephrase the question as this and remove *academic acceptance*, I think it's answerable.
FooBar
CC BY-SA 3.0
2014-12-08T19:51:32.823Z
See pp391-395 here: http://www-personal.umich.edu/~samoore/bit885f2011/hendry-alchemy.pdf (sorry, I couldn't resist).
Ubiquitous
CC BY-SA 3.0
2014-12-09T02:23:41.580Z
VAR, S-VAR, VEC, VAR-X, and in the last time bayesian VAR
user157623
CC BY-SA 3.0
2014-12-09T05:32:04.617Z
Just an FYI on what "most banks" do - I'm assuming you mean private banks. Most private banks will plot their 10 favourite leading indicators and form a judgment. A minority will build a single variable regression with ~5 variables. An handful will build a VAR. One or two might build an SVAR.
lilster
<macroeconomics><inflation><monetary-policy><gdp>
Models for inflation prediction
Zee
# Models for inflation prediction

(Asked by: username_0 on 2014-12-08)

I am looking for some statistical models that are accepted to best predict inflation rates. Anything that is more complicated than linear model will be appreciated. Or even recommend books that discuss inflation predictions.

I would also be interested in models that could relate inflation to GDP(or some form of feature extracted from gdp).

**Tags:** macroeconomics, inflation, monetary-policy, gdp

> **Comments:**
> **username_2**: Haha, good luck with that. There is no broad consensus whatsoever. On one front we have people who believe GDP and inflation are orthogonal, on the other we have a lot of people with a lot of ideas on what causes inflation - everyone with his own. I'm afraid in its current state, this question is too broad.  
> **username_0**: Ok what about the banks and all the interested entities on the marked. Surely they already use some models for prediction.  
> **username_2**: Right, they do large-scale VARs and NK-models. Basically, they throw in anything they have and hope to increase $R^2$. However, this is not a practice that's is really accepted in academia. But, as you say, central banks gotta do something... So if you rephrase the question as this and remove *academic acceptance*, I think it's answerable.  
> **username_3**: See pp391-395 here: http://www-personal.umich.edu/~samoore/bit885f2011/hendry-alchemy.pdf (sorry, I couldn't resist).  
> **username_4**: VAR, S-VAR, VEC, VAR-X, and in the last time bayesian VAR  
> **username_5**: Just an FYI on what "most banks" do - I'm assuming you mean private banks. Most private banks will plot their 10 favourite leading indicators and form a judgment. A minority will build a single variable regression with ~5 variables. An handful will build a VAR. One or two might build an SVAR.  
> **username_1**: @username_0 Inflation prediction for which country / economic area? United States? Eurozone? A small open economy? This aspect will probably matter. Also, why would you want complexity greater than a linear model? Is this really desirable? More complicated models probably won't outperform simpler "robust" models. For inflation and output, there's an old paper by [Kuttner (1994)](https://ideas.repec.org/a/bes/jnlbes/v12y1994i3p361-68.html) - that contains a bivariate state-space model. There are lots of papers along these lines (also trivariate with unemployment, common cycles, etc.). Gordon Triangle.  

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## 1 answers

### Answer by username_6 on 2014-12-09. Score: 4

One approach that you might find useful/interesting would be Bayesian VARs.

An example of a Bayesian VAR being used to predict inflation can be found [here](https://ideas.repec.org/a/eee/dyncon/v29y2005i11p1893-1925.html). In this paper, Tim Cogley, Sergui Morozov, and Tom Sargent motivate some methodology for Bayesian VARs and then compare their results to what the Bank of England uses in their "fan charts" (which they use to predict inflation). Cogley and Sargent have two other papers on inflation that are related to this paper, "[Drifts and Volatilities](http://dx.doi.org/10.1016/j.red.2004.10.009)" and "[Evolving Post-World War II U.S. Inflation Dynamics](http://www.nber.org/chapters/c11068.pdf)." This series of papers is a good expose on some of the theory of inflation and how to statistically approach it.

I believe @username_2 is right that most banks are using large-scale VARs (similar to the aforementioned) and New Keynesian models. This isn't directly related to the question, but there is a literature on model averaging in which they can combine the forecasts of VARs and N-K models to provide a "more informed" (I use the phrase more informed here lightly but I do think the model averaging is helpful) prediction as to what will happen. An example of such a paper can be found [here](http://www.sciencedirect.com/science/article/pii/S0165188911000455)

> **Comments:**
> **username_0**: Thanks @username_6 this is definitely useful and interesting information. However, it is about methods for prediction and not models. Whereas my question is about some general model(ignoring constants of course).  
> **username_7**: @username_6 Nice information ;) could you give an example of a paper with model averaging of VAR and N-K models?  

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