Working Paper Series, Department of Economics, Uppsala University
No 2002:4:
Can Demography Improve Inflation Forecasts? The Case of Sweden
Mattias Bruér
Abstract: Time series regressions indicate that age structure has
significant forecasting power on Swedish inflation. The results agree with
a Phillips-Okun framework, assuming that the demographic composition
affects productivity. The relative age effects are also relatively well in
accordance with what could be expected from life-cycle theory. In the
forecasting exercise the age model outperforms the estimated benchmarks;
i.e. two autoregressive models, an ARIMA and the 2 per cent forecast
corresponding to the stipulated inflation target. The age model is also
considerably better than the consensus forecasts and it is equal in merit
with a general VAR model that has been used by the Riksbank (Bank of
Sweden). We conclude that the source of information embedded in the age
shares is something the Riksbank should consider when conducting monetary
policy. When extending the forecasting horizon, the age model predicts a
significant rise in the inflationary pressure after 2005 when the big baby
boom cohort of the 1940s enters retirement.
Keywords: Inflation forecasting; Demography; Life-cycle hypothesis; (follow links to similar papers)
JEL-Codes: E31; J10; J11; (follow links to similar papers)
35 pages, March 15, 2002
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