Inflation forecasting with rolling windows: An appraisal

We examine the performance of rolling windows procedures in forecasting inflation. We implement rolling windows augmented Dickey–Fuller (ADF) tests and then conduct a set of Monte Carlo experiments under stylized forms of structural breaks. We find that as long as the nature of inflation is either stationary or non‐stationary, popular varying‐length window techniques provide little advantage in forecasting over a conventional fixed‐length window approach. However, we also find that varying‐length window techniques tend to outperform the fixed‐length window method under conditions involving a change in the inflation process from stationary to non‐stationary, and vice versa. Finally, we investigate methods that can provide early warnings of structural breaks, a situation for which the available rolling windows procedures are not well suited.</p

Quantifying Spillovers Among Regions

The standard procedure for quantifying spillover effects of changes in economic fundamentals among separate regions (or countries) is to link the regions through predetermined weights – for example through fixed weighted trade indices or fixed spatial weights based on geographical distance. We provide a method for quantifying spillover effects among the U.S., the euro area, and the U.K. using spatial weights that are determined endogenously. We specify a new spatially augmented VAR model and we introduce a Bayesian estimation technique to freely estimate and quantify spatial interactions. We are able to quantify the effects of shocks to economic fundamentals in the three regions considered without imposing a priori restrictions on the size and directions of the spillovers. To illustrate our technique, we quantify the spillover effects of a series of shocks, including the recent rises in inflation and money supply shocks, in each of the three regions under consideration on the other regions.</p

An evaluation of the inflation forecasting performance of the European Central Bank, the Federal Reserve, and the Bank of England

We provide an overview of the formulation of the forecasts of the European Central Bank, the Federal Reserve, and the Bank of England. We also provide statistical assessments of the performance of the forecasting process of those central banks. We find that the inflation forecasts have, by‐and‐large, been unbiased and efficient at the very short‐term forecast horizon. The performance deteriorates over longer horizons. This latter finding could be attributable, inter alia, to the approach applied in the integration in the forecasting process of the assumptions on the future market‐implied interest rate path.</p