Forecasting inflation rate and output growth.

Abstract

This study evaluates the predictive power of various economic and financial variables for inflation and GDP growth. The research covers the 2003-2013 decade including the recent financial crisis. A simple AR model for the variables under scrutiny serves as a benchmark in our analysis. Our empirical findings suggest that the benchmark performs pretty well for short-term forecasts (up to three months). However, we observe significant improvement in the forecast accuracy of the model for long-term forecasts when the proper predictor augments the benchmark. Among the predictors considered in this study, the unemployment related variables (that is, the unemployment rate, the unemployment gap, the NAIRU and the jobless claims) and capacity utilization seem to be the optimal predictors for output growth and inflation respectively.