Chapter 2 Forecasting UK Inflation: The Roles of Structural Breaks and Time Disaggregation

Abstract

Structural models' inflation forecasts are often inferior to those of naïve devices. This chapter theoretically and empirically assesses this for UK annual and quarterly inflation, using the theoretical framework in Clements and Hendry (1998, 1999). Forecasts from equilibrium-correction mechanisms, built by automatic model selection, are compared to various robust devices. Forecast-error taxonomies for aggregated and time-disaggregated information reveal that the impacts of structural breaks are identical between these, helping to interpret the empirical findings. Forecast failures in structural models are driven by their deterministic terms, confirming location shifts as a pernicious cause thereof, and explaining the success of robust devices.

Citation

Castle, J.L. and Hendry, D.F. (2008), "Chapter 2 Forecasting UK Inflation: The Roles of Structural Breaks and Time Disaggregation", Rapach, D.E. and Wohar, M.E. (Ed.) Forecasting in the Presence of Structural Breaks and Model Uncertainty (Frontiers of Economics and Globalization, Vol. 3), Emerald Group Publishing Limited, Leeds, pp. 41-92. https://doi.org/10.1016/S1574-8715(07)00202-3