Forecasting Inflation with a Zero Lower Bound or Negative Interest Rates: Evidence from Point and Density Forecasts

Journal article


Anderl, C. and Caporale, G. (2022). Forecasting Inflation with a Zero Lower Bound or Negative Interest Rates: Evidence from Point and Density Forecasts. The Manchester School. 91 (3), pp. 171-232. https://doi.org/10.1111/manc.12434
AuthorsAnderl, C. and Caporale, G.
Abstract

This paper investigates the predictive power of the shadow rate for the inflation rate in countries with a zero lower bound (the US, the UK and Canada) and in those with negative rates (Japan, the Euro Area and Switzerland). Using shadow rates obtained from two different models (the Wu-Xia (2016) and the Krippner (2015a) ones) and for different lower bound parameters we compare the out-of-sample forecasting performance of an inflation model including a shadow rate with a benchmark one excluding it. Both specifications are estimated by OLS (Ordinary Least Squares) and includes a range of macroeconomic factors computed by means of principal component analysis. Both point and density forecasts of the inflation rate are evaluated. The models including the shadow rate are found to outperform the benchmark ones according to both sets of criteria except in countries operating an official inflation targeting regime. Both types of shadow rates appear to produce equally accurate out-of-sample inflation forecasts.

Keywordsshadow interest rates, zero lower bound, inflation forecasting, density forecasts
Year2022
JournalThe Manchester School
Journal citation91 (3), pp. 171-232
PublisherWiley
ISSN1467-9957
Digital Object Identifier (DOI)https://doi.org/10.1111/manc.12434
Publication dates
Print06 Mar 2023
Publication process dates
Accepted13 Feb 2023
Deposited17 Feb 2023
Publisher's version
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File Access Level
Open
Accepted author manuscript
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File Access Level
Controlled
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