@article{Distant-Early-Warning:726,
      recid = {726},
      author = {Atta-Mensah, Joseph and Engert, Walter and Hendry, Scott  and Armour, Jamie},
      title = {A Distant-Early-Warning Model of Inflation Based on M1  Disequilibria},
      publisher = {Bank of Canada},
      address = {1996},
      pages = {1 online resource (26 pages)},
      abstract = {A vector error-correction model (VECM) that forecasts  inflation between the current quarter and eight quarters  ahead is found to provide significant leading information  about inflation. The model focusses on the effects of  deviations of M1 from its long-run demand but also  includes, among other things, the influence of the exchange  rate, a simple measure of the output gap and past  prices.

In out-of-sample forecasts of the eight-quarter  inflation rate from 1978 on, the VECM had a mean absolute  error of just over one percentage point, and a  root-mean-squared error of just under two. From the early  1980s on, mean absolute errors and root-mean-squared errors  were both less than one percentage point. In addition,  except for 1982, the model performed well around the  turning points in out-of-sample experiments.

An  interpretation of these results is that monetary  disequilibria—represented here as deviations of M1 from its  long-run demand—are part of the inflation process. That is,  in this model, a "money gap" precedes inflation, and an  aggregate money gap persists until prices change to help  restore monetary equilibrium.},
      url = {http://www.oar-rao.bank-banque-canada.ca/record/726},
      doi = {https://doi.org/10.34989/swp-1996-5},
}