On the directional accuracy of inflation forecasts : evidence from South African survey data

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Authors

Pierdzioch, Christian
Reid, Monique B.
Gupta, Rangan

Journal Title

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Volume Title

Publisher

Taylor and Francis

Abstract

We study the information content of South African inflation survey data by determining the directional accuracy of both short-term and long-term forecasts. We use relative operating characteristic (ROC) curves, which have been applied in a variety of fields including weather forecasting and radiology, to ascertain the directional accuracy of the forecasts. A ROC curve summarizes the directional accuracy of forecasts by comparing the rate of true signals (sensitivity) with the rate of false signals (one minus specifity). A ROC curve goes beyond market-timing tests widely studied in earlier research as this comparison is carried out for many alternative values of a decision criterion that discriminates between signals (of a rising inflation rate) and nonsignals (of an unchanged or a falling inflation rate). We find consistent evidence that forecasts contain information with respect to the subsequent direction of change of the inflation rate.

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Keywords

Relative operating characteristic (ROC), Inflation rate, Forecasting, Directional accuracy, South Africa (SA)

Sustainable Development Goals

Citation

Christian Pierdzioch, Monique B. Reid & Rangan Gupta (2018) On the directional accuracy of inflation forecasts: evidence from South African survey data, Journal of Applied Statistics, 45:5, 884-900, DOI: 10.1080/02664763.2017.1322556.