Forecasting Inflation in Latin America with Core Measures

2019. International Journal of Forecasting. Volume 35, Issue 3, July–September 2019, Pages 1060-1071

José Nolazco , Pablo Pincheira, Jorge Selaive C

Abstract:

We explore the ability of core inflation to predict headline CPI annual inflation for a sample of 8 developing economies in Latin America during the period January 1995-May 2017. Our in-sample and out-of-sample results are roughly consistent in providing robust evidence of predictability in 4 countries of our sample. Mixed evidence is found for the other four countries. The bulk of the out-of-sample evidence of predictability concentrates at the short horizons of 1 and 6 months. In contrast, at the longest horizon of 24 months, we only find out-of-sample evidence of predictability for two countries: Chile and Colombia. This is both important and challenging, given that monetary authorities in our sample of developing countries are currently implementing or given steps toward the future implementation of inflation targeting regimes, which are heavily based on long run inflation forecasts.

Palabras claves: Inflation, Forecasting, Time Series, Monetary Policy, Core Inflation, Developing Countries. 

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