It's Not Just for Inflation: The Usefulness of the Median CPI in BVAR Forecasting

39 Pages Posted: 15 Nov 2013

See all articles by Brent Meyer

Brent Meyer

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Saeed Zaman

Federal Reserve Bank of Cleveland

Date Written: February 26, 2013

Abstract

In this paper we investigate the forecasting performance of the median CPI in a variety of Bayesian VARs (BVARs) that are often used for monetary policy. Until now, the use of trimmed-mean price statistics in forecasting inflation has often been relegated to simple univariate or "Philips-Curve" approaches, thus limiting their usefulness in applications that require consistent forecasts of multiple macro variables. We find that inclusion of an extreme trimmed-mean measure — the median CPI — significantly improves the forecasts of both headline and core CPI across our wide-ranging set of BVARs. While the inflation forecasting improvements are perhaps not surprising given the current literature on core inflation statistics, we also find that inclusion of the median CPI improves the forecasting accuracy of the central bank’s primary instrument for monetary policy — the federal funds rate. We conclude with a few illustrative exercises that highlight the usefulness of using the median CPI.

Keywords: Inflation, Inflation forecasting, trimmed-mean estimators, Bayesian

JEL Classification: C11, E37, E31, E52

Suggested Citation

Meyer, Brent H. and Zaman, Saeed, It's Not Just for Inflation: The Usefulness of the Median CPI in BVAR Forecasting (February 26, 2013). FRB of Cleveland Working Paper No. 13-03, Available at SSRN: https://ssrn.com/abstract=2354031

Brent H. Meyer (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Saeed Zaman

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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