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.
Original language | English |
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Pages (from-to) | 171-232 |
Number of pages | 62 |
Journal | The Manchester School |
Volume | 91 |
Issue number | 3 |
DOIs | |
Publication status | Published - 6 Mar 2023 |
Bibliographical note
Publisher Copyright:© 2023 The Authors. The Manchester School published by The University of Manchester and John Wiley & Sons Ltd.
Keywords
- shadow interest rates, zero lower bound, inflation forecasting, density forecasts