The Role of Seasonality and Monetary Policy in Inflation Forecasting

27 Pages Posted: 23 Aug 2006

See all articles by Francis Y. Kumah

Francis Y. Kumah

International Monetary Fund (IMF)

Date Written: July 2006


Adequate modeling of the seasonal structure of consumer prices is essential for inflation forecasting. This paper suggests a new econometric approach for jointly determining inflation forecasts and monetary policy stances, particularly where seasonal fluctuations of economic activity and prices are pronounced. In an application of the framework, the paper characterizes and investigates the stability of the seasonal pattern of consumer prices in the Kyrgyz Republic and estimates optimal money growth and implied exchange rate paths along with a jointly determined inflation forecast. The approach uses two broad specifications of an augmented error-correction model - with and without seasonal components. Findings from the paper confirm empirical superiority (in terms of information content and contributions to policymaking) of augmented error-correction models of inflation over single-equation, Box-Jenkins-type general autoregressive seasonal models. Simulations of the estimated error-correction models yield optimal monetary policy paths for achieving inflation targets and demonstrate the empirical significance of seasonality and monetary policy in inflation forecasting.

Keywords: Inflation forecasting, seasonal unit roots, monetary policy stance, error-correction models, VAR

JEL Classification: C53, E37, E52

Suggested Citation

Kumah, Francis Y., The Role of Seasonality and Monetary Policy in Inflation Forecasting (July 2006). IMF Working Paper No. 06/175, Available at SSRN:

Francis Y. Kumah (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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