FORECASTING INDONESIAN INFLATION WITHIN AN INFLATION-TARGETING FRAMEWORK: DO LARGE-SCALE MODELS PAY OFF?

  • Solikin M. Juhro Bank Indonesia
  • Bernard Njindan Iyke Deakin University

Abstract

We examine the usefulness of large-scale inflation forecasting models in Indonesia within an inflation-targeting framework. Using a dynamic model averaging approach to address three issues the policymaker faces when forecasting inflation, namely, parameter, predictor, and model uncertainties, we show that large-scale models have significant payoffs. Our in-sample forecasts suggest that 60% of 15 exogenous predictors significantly forecast inflation, given a posterior inclusion probability cut-off of approximately 50%. We show that nearly 87% of the predictors can forecast inflation if we lower the cut-off to approximately 40%. Our out-of-sample forecasts suggest that large-scale inflation forecasting models have substantial forecasting power relative to simple models of inflation persistence at longer horizons.

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Published
2019-12-31
How to Cite
Juhro, S., & Njindan Iyke, B. (2019). FORECASTING INDONESIAN INFLATION WITHIN AN INFLATION-TARGETING FRAMEWORK: DO LARGE-SCALE MODELS PAY OFF?. Buletin Ekonomi Moneter Dan Perbankan, 22(4), 423 - 436. https://doi.org/10.21098/bemp.v22i4.1235
Section
Articles