Alternative regime switching models for forecasting inflation

Abstract

US inflation appears to undergo shifts in its mean level and variability. We evaluate the performance of three useful models for capturing such shifts. The models studied are the Markov switching models, state space models with heavy‐tailed errors, and state space models with compound error distributions. Our study shows that all three models have very similar performance when evaluated in terms of the mean squared or mean absolute forecast errors. However, the latter two models are considerably more parsimonious, and easily beat the more profligately parameterized Markov switching models in terms of model selection criteria, such as the AIC or the SBC. Thus, these may serve as useful continuous alternatives to the popular discrete Markov switching models for capturing shifts in time series. Copyright © 2001 John Wiley & Sons, Ltd.

Forecasting Brazilian Inflation by Its Aggregate and Disaggregated Data: A Test of Predictive Power by Forecast Horizon

“…The Markovswitching models have been especially designed to capture this kind of phenomenon in the series. Studies in this regard are found in Evans and Wachtel (1993), Kim (1993), Bidarkota andMcCulloch (1998), andBidarkota (2001).…”

Forecasting Brazilian Inflation by Its Aggregate and Disaggregated Data: A Test of Predictive Power by Forecast Horizon

“…The Markovswitching models have been especially designed to capture this kind of phenomenon in the series. Studies in this regard are found in Evans and Wachtel (1993), Kim (1993), Bidarkota andMcCulloch (1998), andBidarkota (2001).…”

A Markov-Switching Model of Inflation in Bolivia

“…The utilization of Markov-Switching models in articles specific to inflation is also wide, with many focusing on the relationship between inflation and inflation uncertainty. Kim (1993a); Simon (1996); Bidarkota (2001); Moroney (2002); Binner et al (2006); Amisano and Fagan (2013); Davig and Doh (2014); and Aye et al (2016), are representative works in this area.…”

Asset pricing with incomplete information and fat tails

“…In this paper we evaluate the integrals using quadrature methods. Details on the numerical method employed and its accuracy are omitted here for the sake of brevity but are available in a related context in McCulloch (1998, 2004) and Bidarkota (2001Bidarkota ( , 2003. Kitagawa (1987) also provides extensive details on accuracy of quadrature techniques for estimation in this context.…”

Forecasting Brazilian Inflation by Its Aggregate and Disaggregated Data: A Test of Predictive Power by Forecast Horizon

“…The Markovswitching models have been especially designed to capture this kind of phenomenon in the series. Studies in this regard are found in Evans and Wachtel (1993), Kim (1993), Bidarkota andMcCulloch (1998), andBidarkota (2001).…”

A Markov-Switching Model of Inflation in Bolivia

“…The utilization of Markov-Switching models in articles specific to inflation is also wide, with many focusing on the relationship between inflation and inflation uncertainty. Kim (1993a); Simon (1996); Bidarkota (2001); Moroney (2002); Binner et al (2006); Amisano and Fagan (2013); Davig and Doh (2014); and Aye et al (2016), are representative works in this area.…”

Asset pricing with incomplete information and fat tails

“…In this paper we evaluate the integrals using quadrature methods. Details on the numerical method employed and its accuracy are omitted here for the sake of brevity but are available in a related context in McCulloch (1998, 2004) and Bidarkota (2001Bidarkota ( , 2003. Kitagawa (1987) also provides extensive details on accuracy of quadrature techniques for estimation in this context.…”

Forecasting Brazilian Inflation by Its Aggregate and Disaggregated Data: A Test of Predictive Power by Forecast Horizon

“…The Markovswitching models have been especially designed to capture this kind of phenomenon in the series. Studies in this regard are found in Evans and Wachtel (1993), Kim (1993), Bidarkota andMcCulloch (1998), andBidarkota (2001).…”

A Markov-Switching Model of Inflation in Bolivia

“…The utilization of Markov-Switching models in articles specific to inflation is also wide, with many focusing on the relationship between inflation and inflation uncertainty. Kim (1993a); Simon (1996); Bidarkota (2001); Moroney (2002); Binner et al (2006); Amisano and Fagan (2013); Davig and Doh (2014); and Aye et al (2016), are representative works in this area.…”

Asset pricing with incomplete information and fat tails

“…In this paper we evaluate the integrals using quadrature methods. Details on the numerical method employed and its accuracy are omitted here for the sake of brevity but are available in a related context in McCulloch (1998, 2004) and Bidarkota (2001Bidarkota ( , 2003. Kitagawa (1987) also provides extensive details on accuracy of quadrature techniques for estimation in this context.…”