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Forecasting industry-level CPI and PPI inflation : does exchange rate pass-through matter?

journal contribution
posted on 01.01.2008, 00:00 authored by Prasad BhattacharyaPrasad Bhattacharya, D Thomakos
We show that incorporating the effects of exchange rate pass-through into a model can help in obtaining superior forecasts of domestic, industry-level inflation. Our analysis is based on a multivariate system of domestic inflation, import prices and exchange rates that incorporates restrictions from economic theory. These are restrictions on the transmission channels of the exchange rate pass-through to domestic prices, and are presented as testable hypotheses that lead to model reduction. We provide the results of various tests, including causality and prior restrictions, which support the underlying economic arguments and the model we use. The forecasting results for our model suggest that it has a superior performance overall, jointly producing more accurate forecasts of domestic inflation.

History

Journal

International journal of forecasting

Volume

24

Issue

1

Season

January-March

Pagination

134 - 150

Publisher

Elsevier B.V.

Location

Amsterdam, Netherlands

ISSN

0169-2070

eISSN

1872-8200

Language

eng

Publication classification

C1 Refereed article in a scholarly journal

Copyright notice

2007, International Institute of Forecasters