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Konjunkturinstitutet - National Institute of Economic Research Working Papers, Konjunkturinstitutet - National Institute of Economic Research

No 126:
Forecasting Inflation Using Constant Gain Least Squares

Jan-Erik Antipin (), Farid Jimmy Boumediene () and Pär Österholm ()

Abstract: This paper assesses the usefulness of constant gain least squares when forecasting inflation. An out-of-sample forecast exercise is conducted, in which univariate autoregressive models for inflation in Australia, Swe-den, the United Kingdom and the United States are used. The results suggest that it is possible to improve the forecast accuracy by employing constant gain least squares instead of ordinary least squares. In particular, when using a gain of 0.05, constant gain least squares generally outper-forms the corresponding autoregressive model estimated with ordinary least squares. In fact, at longer forecast horizons, the root mean square forecast error is reliably lowered for all four countries and for all lag lengths considered in the study.

Keywords: Out-of-sample forecasts; Inflation; (follow links to similar papers)

JEL-Codes: E31; E37; (follow links to similar papers)

26 pages, February 1, 2012

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