Central Bank of Chile paper supports unit root-based inflation forecasts

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A working paper, published by the Central Bank of Chile in July, assesses the effectiveness of unit root-based forecasts in predicting inflation, despite problems previously highlighted with such models.

The authors, Pablo Pincheira and Carlos Medel, say past research has shown unit root forecasts produce a deterministic trend approaching infinity at long time horizons, which, they say, is in conflict with the forecasting of a stationary process such as inflation.

However, the paper tests a unit

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