Forecasting inflation using Bayesian nonparametric methods

Todd E. Clark, Florian Huber, Gary Koop, Massimilano Marcellino

Research output: Contribution to journalArticlepeer-review

Abstract

The relationship between inflation and predictors such as unemployment is potentially nonlinear with a strength that varies over time, and prediction errors error may be subject to large, asymmetric shocks. Inspired by these concerns, we develop a model for inflation forecasting that is nonparametric both in the conditional mean and in the error using Gaussian and Dirichlet processes, respectively. We discuss how both these features may be important in producing accurate forecasts of inflation. In a forecasting exercise involving CPI inflation, we find that our approach has substantial benefits, both overall and in the left tail, with nonparametric modeling
of the conditional mean being of particular importance.
Original languageEnglish
Pages (from-to)1-38
Number of pages38
JournalAnnals of Applied Statistics
Publication statusAccepted/In press - 17 Oct 2023

Keywords

  • nonparametric regression
  • Gaussian process
  • Dirichlet process mixture
  • inflation forecasting

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