Abstract
Focus
That are The important factor drivers of inflation, and what position do expectations play Inside the inflation course of have been prolonged-standing questions in macrofinancials, notably given their relevance to financial policymaking. This paper sheds some current mild on these central questions using machine studying.
Contrihoweverion
I look at inflation in 20 superior economies since 2000 by way of the lens of A versatile knowledge-pushed method. Past evaluating explanatory efficiency with extra conventional econometric strategies, So far as potential, I additionally interpret The anticipated relations between explanatory variables and shopper worth inflation.
Findings
The machine studying mannequin predicts headline and core CPI inflation comparatively properly, even when solely a small regular set of macrofinancial indicators is used. Inflation prediction errors are smaller than with regular OLS fashions using The identical set of explanatory variables – which are firmly grounded on financial concept. Expectations emerge as An important predictor of CPI inflation. That said, the relative significance of expectations has declined Over the previous 10 years.
Abstract
This paper look ats the drivers of CPI inflation by way of the lens of a straightforward, however computationally intensive machine studying method. More particularly, it predicts inflation throughout 20 superior nations between 2000 and 2021, Counting on 1,000 regression timber That are constructed based mostly on six key macrofinancial variables. This agnostic, purely knowledge pushed method delivers (comparatively) good Outcome prediction efficiency. Out of pattern root imply sq. errors (RMSE) systematically beat even the in-pattern benchmark econometric fashions, with a 28% RMSE discount relative to a naïve AR(1) mannequin and a 8% RMSE discount relative to OLS. General, The Outcomes highmild the position of expectations for inflation Outcomes in superior economies, Regardless of The very Incontrovertible actuality that their significance seems to have declined considerably Over the previous 10 years.
Key phrases: expectations, forecast, inflation, machine studying, oil worth, output hole, Phillips curve.
JEL classification: E27, E30, E31, E37, E52, F41.
