The usefulness of the median CPI in Bayesian VARs used for macroeconomic forecasting and policy

Brent Meyer, Saeed Zaman

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Abstract

In this paper, we investigate the forecasting performance of the median Consumer Price Index (CPI) in a variety of Bayesian Vector Autoregressions (BVARs) that are often used for monetary policy. Until now, the use of trimmed-mean price statistics in forecasting inflation has often been relegated to simple univariate or “Phillips-Curve” approaches, thus limiting their usefulness in applications that require consistent forecasts of multiple macro-variables. We find that inclusion of an extreme trimmed-mean measure—the median CPI—improves the forecasts of both core and headline inflation (CPI and personal consumption expenditures price index) across our set of monthly and quarterly BVARs. While the inflation forecasting improvements are perhaps not surprising given the current literature on core inflation statistics, we also find that inclusion of the median CPI improves the forecasting accuracy of the central bank’s primary instrument for monetary policy—the federal funds rate. We conclude with a few illustrative exercises that highlight the usefulness of using the median CPI.

Original languageEnglish
Pages (from-to)603-630
Number of pages28
JournalEmpirical Economics
Volume57
Issue number2
Early online date5 Jun 2018
DOIs
Publication statusPublished - 31 Aug 2019

Keywords

  • inflation forecasting
  • trimmed-mean estimators
  • Bayesian Vector Autoregression
  • conditional forecasting

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