The indicator models of core inflation for Canada / by Richard Dion.: FB3-2/99-13E

When there is uncertainty about estimates of the margin of unused capacity in the economy, examining a range of inflation indicators may help in assessing the balance of risks regarding the outlook for inflation. This paper tests a wide range of observable variables for their leading-indicator properties with respect to core inflation, including: commodity prices, cost indicators, measures of capacity pressures in labour and product markets, and components of the consumer price index (CPI) itself. After a preliminary screening of indicators using Granger causality tests, estimated bivariate indicator models generate post-sample static forecasts one quarter ahead and two quarters ahead over the period 1995 (Q1). A ridge regression technique is used to optimally combine selected bivariate forecasts into multivariate forecasts. The root-mean-squared errors of both the bivariate and multivariate forecasts are compared with those of benchmark models -- a Phillips curve, an autoregressive model, and two naive models.--Abstract

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