Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 138: Finding Good Predictors for Inflation: A Bayesian Model Averaging Approach

Tor Jacobson () and Sune Karlsson ()
Additional contact information
Tor Jacobson: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Sune Karlsson: Stockholm School of Economics, Postal: Box 6501, SE-113 83 Stockholm, Sweden

Abstract: We consider a Bayesian Model Averaging approach for the purpose of forecasting Swedish consumer price index inflation using a large set of potential indicators, comprising some 80 quarterly time series covering a wide spectrum of Swedish economic activity. The paper demonstrates how to efficiently and systematically evaluate (almost) all possible models that these indicators in combination can give rise to. The results, in terms of out-of-sample-performance, suggest that Bayesian Model Averaging is a useful alternative to other forecasting procedures, in particular recognizing the flexibility by which new information can be incorporated.

Keywords: Variable selection; Markov chain Monte Carlo; Forecast

JEL-codes: C11; C51; C52; C53

24 pages, August 1, 2002

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Published as
Tor Jacobson and Sune Karlsson, (2004), 'Finding Good Predictors for Inflation: A Bayesian Model Averaging Approach', Journal of Forecasting, vol 23, no 7, pages 479-496

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