Forecasting Inflation: The Predictive Ability and Stability of Financial Variables

Abstract

Forecasting major macroeconomic variables has been a subject of key interest for many academicians and professionals over the past many years. This study examines the predictive ability of different financial and non-financial variables in forecasting inflation of Norway, Sweden and Finland. Using quarterly data from 1984 to 2013, the study finds that some variables provide better forecasting performance relative to the simple autoregressive benchmark model in out-of-sample forecasts. However, the performances of the predictors are not stable over time and across countries; and no individual variable produces forecast that is significantly different from the forecast generated by the benchmark model.