This paper evaluates the forecasting performance of factor models for Canadian inflation. This type of model was introduced and examined by Stock and Watson (1999a), who have shown that it is quite promising for forecasting U.S. inflation. Using a dimension-reduction method similar to...

This article evaluates the forecasting performance of dynamic factor models for Canadian inflation. We find that factor models are as good as more conventional forecasting models, while a model estimated using only US data, is at least as useful as a model that incorporates Canadian data. This...