Thursday, 22 May 2008

Forecasting Inflation in China

Inflation in China is something of a hot topic to the extent that the blog and newspaper coverage of this topic is seemingly endless. China Financial Markets for example has long detailed posts on inflation and its cures and consequences daily.

This academic paper from the Bank of Finland is either very timely or completely out of date already. I find it hard to believe the forecasts from a month or two ago can be in any way accurate even a few months later.

The methodology may be of more interest.

Judge for yourself.

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Forecasting Inflation in China

AARON N. MEHROTRA
Bank of Finland - Institute for Economies in Transition (BOFIT); European University Institute - Economics Department (ECO)
JOSÉ R. SÁNCHEZ-FUNG
Kingston University January 27, 2008

BOFIT Discussion Paper No. 2/2008

Abstract:
This paper forecasts inflation in China over a 12-month horizon. The analysis runs 15 alternative models and finds that only those considering many predictors via a principal component display a better relative forecasting performance than the univariate benchmark.


Keywords: inflation forecasting, data-rich environment, principal components, China

JEL Classifications: C53, E31

3 comments:

DOR said...

On this subject, I strongly recommend Victor Shih's book on factions and finance. While I disagree with much of it, there is a serious discussion of decentralization as the cause of inflation.
Shih, Victor C., "Factions and Finance in China: Elite Conflict and Inflation,", Cambridge University Press (New York: 2008) ISBN 978-0-521-87257-7

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