The role of commodity prices, market prices and business expectations in predicting changes in the CPI: An application of Neftci's methodology to inflation.
Item
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Title
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The role of commodity prices, market prices and business expectations in predicting changes in the CPI: An application of Neftci's methodology to inflation.
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Identifier
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AAI9304683
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identifier
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9304683
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Creator
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Kearney, Timothy Francis.
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Contributor
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Adviser: Salih N. Neftci
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Date
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1992
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, General | Economics, Finance | Economics, Commerce-Business
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Abstract
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In response to the poor forecasting record of standard inflation models in the 1980s, Federal Reserve Governors Wayne Angell and Manuel Johnson advocated the use of a market-based commodity price rule (CPR) when assessing price trends. The CPR proposal suggests that expectations are informationally efficient, and so anticipate inflation developments. This study, in contrast to most empirical work to date, tests the use of expectations variables such as changes in commodity prices, the shape of the yield curve and business expectations in predicting inflation based on their information content alone. Having demonstrated the use of such variables in predicting changes in the CPI, the study then compares the forecasting ability of the expectations variables with a leading inflation index that also includes structural variables. In six of the nine periods tested, the root mean square error and Theil's U from a dynamic forecasting model are lower when using the expectation variables only. Next, Neftci's methodology for forecasting turning points in the real economy is applied to inflation. The Neftci methodology is grounded in the assumption that a change in regime (in this case a move from inflation to disinflation or the reverse) is signalled by sharp, simultaneous downturns in a number of economic variables. An index is constructed with the expectations variables being used as a leading indicator of inflation. When the index reaches 90, then a change in regime is deemed "imminent". The application of Neftci's methodology shows considerable promise. Of the eight inflation episodes examined here, five were signalled by the Neftci index.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
