Forecasting Inflation in Chile Using State-Space and Regime-Switching Models

The paper estimates two time-varying parameter models of Chilean inflation: a Phillips curve model and a small open economy model. Their out-of-sample forecasts are compared with those of simple Box-Jenkins models. The main findings are; forecasts that include the pre-announced inflation target as a regressor are relatively better; the Phillips curve model outperforms the small open economy model in out-of-sample forecasts; and although Box-Jenkins models outperform the two models for short-term out-of-sample forecasts, their superiority deteriorates in longer forecasts. Adding a Markov-switching process to the models does not explain much of the conditional variance of the forecast errors.Economic models;inflation, inflation target, monetary policy, inflation targeting, annual inflation, money stock, central bank, terms of trade, real interest rate, monetary authority, inflation targeting regime, monetary fund, monetary policy regime, aggregate demand, inflation process, monetary economics, monetary targeting, inflation forecasts, price level, inflation rate, forecasting inflation, monetary transmission, actual inflation, monetary transmission mechanism, nominal interest rate, monetary policy rules, average inflation, money demand, monetary policy framework, rational expectations, monetary growth, money markets, terms of trade shocks, price stability, monetary shocks, real output, relative prices, real variables, monetary authority of singapore, demand for money, monetary authorities, general price level, variable inflation