Inflation Forecasting In Emerging Markets: A Machine Learning Approach
Author(s) Kriti Mahajan and Anand Srinivasan

ABSTRACT

In developing and emerging economies, the accuracy of macroeconomic forecasts is often constrained by the limited availability of data both in time series and in cross-section. Given this constraint, this paper uses a suite of machine learning methods to explore if they can offer any improvements in forecast accuracy for headline CPI inflation (y-o-y) in 3 emerging market economies: India, China and South Africa. For each forecast horizon for each country, we use a host of machine learning models and compare the accuracy of each method to 2 benchmark models (namely, a moving average forecast and SARIMA). For India, we find that the deep neural networks out-perform the benchmark forecast for all horizons except the 1 month ahead forecast. The reduction in forecasting error ranges from 44% to 63%. For South Africa, the neural network model provides a reduction in forecasting error between 42% and 57% for the 1 year forecast. For China, the reduction in forecasting error is much more modest ranging from 5% to 33%. An average forecast using different neural net methods performs much better than any individual forecast.


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