2023 11th International Conference on Information and Communication Technology (ICoICT)
Inflation Rate Prediction by Involving Interest Rate
Using Vector Autoregression Model
1st Azriel Naufal Aulia 2nd Aniq A. Rohmawati
School of Computing School of Computing
Telkom University
2023 11th International Conference on Information and Communication Technology (ICoICT) | 979-8-3503-2198-2/23/$31.00 ©2023 IEEE | DOI: 10.1109/ICoICT58202.2023.10262732
Bandung, Indonesia Bandung, Indonesia
azrielnaufal@s.telkomuniversity.ac.id aniqatiqi@telkomuniversity.ac.id
Abstract—In 2022, the majority of countries experienced a
significant increase in inflation, and it is predicted that the
phenomenon of high inflation rates will continue to hit the world
in 2023. A high inflation rate encourages a country to raise its
interest rate, which on the other hand has a risk of limiting
economic growth and increasing the possibility of a country’s
recession. With so many uncertainties in macroeconomics in the
future, this could result in excessive public concern. So, a time
series model that can predict fluctuations in Indonesia’s
inflation rate is very needed. Therefore, this study proposes
forecasting Indonesia’s inflation using the Vector
Autoregression (VAR) method by involving an interest rate
dataset based on a strong Granger relationship from interest
rates to inflation. The VAR model is used because the Akaike
Information Criteria (AIC) value obtained is the smallest among
other Vector Autoregression Moving Average (VARMA)
models, indicating it to be the most optimal model in terms of
both goodness of fit and model complexity. The prediction
results will be evaluated using the Mean Absolute Percentage
Error (MAPE). According to research, the proposed predictions
from the VAR model show that the VAR(5) method can be said
to be the optimal method to predict Indonesia’s inflation rate,
with a MAPE value of 10.2%.
Keywords—The inflation rate, Granger causality, VARMA,
AIC, MAPE
I. INTRODUCTION
In macroeconomic terms, inflation is defined as a
sustained increase in the overall prices of goods and services.
The negative effects of high and unstable inflation include a
decline in people’s purchasing power and a decrease in the
production and sales of goods, which can lead to a reduction
in investment and a slowdown in economic activity. To
manage inflation at a normal level, one strategy is to use
interest rates (BI Rates or Bank Indonesia Rates). By
increasing interest rates, the central bank can encourage
people to save rather than spend, which can help reduce price
pressures and lower inflation [1].
There are concerns about the global economy, particularly
as we approach 2023. According to one of the largest financial
institutions in the world, Goldman Sachs, it is expected that
the global economy will grow by about 1.8% in 2023, a
decrease from the previous prediction of 2.5%. This is due to
various factors such as high inflation in most countries,
COVID restrictions in China, rising commodity prices, food
crises, and conflicts between Russia and Ukraine [2].
However, in Indonesia, the inflation rate decreased to 5.71%
in October 2022 from 5.95% in September 2022, which
generate optimism about Indonesia’s economic growth by the
end of 2022. The author was motivated by this phenomenon
to use the Vector Autoregressive Moving Average (VARMA)
time series model to predict Indonesia’s inflation rate in the
future.
Authorized licensed use limited to: Institut Teknologi Bandung. Downloaded on November 14,2023 at 03:19:27 UTC from IEEE Xplore. Restrictions apply.
979-8-3503-2198-2/23/$31.00 ©2023 IEEE
3rd Indwiarti
School of Computing
Telkom University Telkom University
Bandung, Indonesia
indwiarti@telkomuniversity.ac.id
The VARMA model is a multivariate mathematical and
statistical-based model that is commonly used in
econometrics. This is due to its ability to handle data with
short and long-term relationships from Autoregressive (AR)
and Moving Average (MA) components, which is mostly seen
in economics [6]. Moreover, with the VARMA model, all
variables in the system are treated as endogenous, expressed
as functions of the lagged values of each other. This provides
a better understanding of the dynamic relationship between
the two economic variables being studied. A study conducted
by Nairobi [10] analyzed the relationship between energy
inflation data and gasoline prices using a VAR(3) model. The
study concluded that the previous changes in gasoline prices
greatly influence gasoline prices and energy inflation 12
months ahead.
One study that implemented the VARMA model and its
derivatives in the field of econometric prediction is Pascal [12]
research on inflation rate prediction in Kenya, incorporating
imported crude oil data. The study resulted in a VARMA(2,1)
model and obtained a Mean Absolute Error (MAE) value of
0.66%, which is a good performance considering the average
inflation rate at that time was around 6%. Another research
regarding the prediction of inflation was conducted by Farida
[13], which focused on constructing an Autoregressive
Integrated Moving Average (ARIMA) model to predict
Malang's monthly inflation rate. The study resulted in an
ARIMA(2,0,3) model, with a Mean Absolute Error (MAE) of
0.2%, given that Malang's inflation fluctuated around 2-5%
from 2015 to 2019.
Further study that involves the use of the VARMA model
in fields beyond economics is a study by Pratama [3] that
implements a Vector Autoregressive (VAR) model to predict
Covid-19 cases in West Java. The study used new cases and
new recovery data, which resulted VAR(5) model based on
AIC value, with a MAPE value of 4.67%. There is a study by
I Nengah [4] using VARMA to predict nominal electronic
money transactions using the volume of electronic money
transactions and the amount of circulating money (M1). From
the study, a VARMA (5,1) model was obtained which resulted
in a MAPE value of 23.728%.
In these research studies, the VARMA time series model
is used to predict Indonesia’s inflation rate by considering
interest rates. The structure of this paper is as follows: First,
we analyze the relationship between inflation and interest rate
data, then we run the Augmented Dickey-Fuller (ADF) test to
test the stationarity in the data, next we select the order
parameter for the VARMA model, and the resulting model
will be used to make inflation predictions. Besides predicting
inflation, this research aims to examine the significance of
interest rates in assisting inflation prediction. Therefore, the
VARMA model will be compared with its univariate
counterpart, the Autoregressive Moving Average (ARMA),
based on its MAPE value. After the result was conducted and
208
evaluated, the last section is the conclusion of this study and to check whether interest rate ( ) affects inflation ( ) can be
offers suggestions for future research. defined as follows [5]:
II. METHODOLOGY | (1)
This study utilizes a dataset comprising 274 monthly As shown in Equation (1), where | is the
observations of Indonesia’s inflation and interest rates from conditional probability distribution of given the bivariate
January 2000 to October 2022. The data were collected from information consisting of the vector and with a
the official websites of Bank Indonesia and the Central length of L lags , where
Bureau of Statistics (BPS).
,.., and ,.., If the above
equation is not satisfied, then data From the previous
period can help predict time series data [5].
A Granger causality analysis will be performed on the
relationship between interest rate and inflation, using lags 1 to
5, as shown in Table I. Lags refer to the number of past values
of the interest rate that are included in the examination to
assess its impact on inflation. The null hypothesis H0 states
that interest rate does not Granger cause inflation, and the
alternative hypothesis posits that interest rate does Granger
cause inflation.
TABLE I. GRANGER CAUSALITY TEST ON THE INTEREST RATES
TO INFLATION
Fig. 1. Indonesia’s Inflation and Interest Rates from 2000 until 2022
Lag
The first step was to conduct a Granger Causality test for Properties
1 2 3 4 5
interest rate into inflation. After this, the stationary of the
F-stat 6.7043 21.0395 16.7302 10.2591 8.2139
dataset was examined, and the optimal order of the
parameters was determined based on the Akaike Information P-value 0.01 0.00 0.00 0.00 0.00
Criteria (AIC). Using these parameters, a statistical model
was constructed to model the data. Finally, the model was
used to forecast inflation and the accuracy of the forecast was The results of the Granger Causality test from lag 1 to 5
quantified using the MAPE. The research method used in this were significant at 5%, then we can accept the alternative
study is illustrated in a flowchart shown in Fig. 1, which hypothesis H1 which is the interest rate variable has a Granger
outlines the process from start to finish. relationship into inflation, so the interest rate can be used as
an additional predictor to assist in the VARMA modeling for
predicting inflation rate in the future.
Next, the correlation and cointegration between inflation
and interest rate were then examined, with a Pearson
Correlation revealing a high correlation of 0.75 or 75%. Then,
a cointegration test was applied to check the long-term
relationship between the two variables. Using variables and
as interest rate and inflation [6]:
μ (2)
As shown in Equation (2), where is a constant value, μ
is the residual from the linear combination of and that
to be tested for stationarity. If stationary, and variables
are said to be cointegrated. Subsequently, the ADF test will be
applied to μ with The null hypothesis H0 positing that µt is
non-stationary, therefore and are not cointegrated. The
alternative hypothesis is that μ is stationary, resulting in
and being cointegrated. The result of ADF testing yielded
a p-value of 0.002, thus we can reject the null hypothesis
indicating that there is a long-term cointegration relationship
Fig. 2. Flowchart of Research Methodology between the inflation and interest rate variables.
B. Stationary
A. Relationship Between Inflation and Interest Rates A stationary dataset is essential for time series analysis.
Granger Causality is a statistical hypothesis test that There are 2 forms of a stationary process, namely trend
evaluates whether one time series data is useful in predicting stationary and difference stationary. Difference-stationary
another time series data. The test is performed on the contains a fluctuating mean on a stochastic trend, while trend-
relationship between interest rate into inflation, to be used as stationary contains a fluctuating mean on a deterministic time
a basis for using interest rates as predictors in the VARMA
time series model. The equation for the Granger Causality test

Authorized licensed use limited to: Institut Teknologi Bandung. Downloaded on November 14,2023 at 03:19:27 UTC from IEEE Xplore. Restrictions apply.
209
trend [7]. Trend stationary process can be denoted as follows
[8]:
μ (3)
As illustrated in Equation (3), process is a stationary
stochastic process with mean 0, and is a deterministic time
process that can take the form of a constant, μ = μ , a linear
trend, μ = μ μ , or a polynomial trend. The stationary of
these two processes can be tested based on the presence of a
unit root in the formula. One method for doing this is using
the ADF test, with the null hypothesis H0 being that the data
is non-stationary or has a unit root, and the alternative
hypothesis H1 being that the data is stationary [8].
TABLE Ⅱ. ADF TEST RESULT
Dataset P-value Description
Inflation 0.001 Trend Stationary
Interest Rate 0.01 Trend Stationary
According to Table Ⅱ, the ADF test for stationarity is
applied by including a deterministic trend in the unit root test
formula, to capture the presence of a trend in the data. Based
on the test results, the p-value for both the inflation and
interest rate variables is below the 5% significance level.
Based on this outcome, the null hypothesis H0 is rejected,
indicating the absence of a unit root in the variables, and
resulting in trend stationary form characteristics for both
variables.
C. Order Parameter Estimation
After verifying that the data is stationary, it can be used
for modeling. The AIC can be used to identify the best lag
parameter for the model. Essentially, the order of the optimal
VARMA model is determined by the lowest AIC score for a
particular combination of orders. The Autocorrelation
Function (ACF) and Partial Autocorrelation Function
(PACF) of the inflation and interest rate data are used to
choose which combination of orders MA(q) and AR(p) would
be calculated with the AIC value.
Fig. 3. Both of ACF has no cut-off and slowly decay on both data
Authorized licensed use limited to: Institut Teknologi Bandung. Downloaded on November 14,2023 at 03:19:27 UTC from IEEE Xplore. Restrictions apply.
210
Fig. 4. PACF shows the order of inflation rates is AR(2) and AR(7) for
interest rates
The ACF and PACF of inflation and interest rate are
shown in Fig. 2 and Fig. 3. The x-axis represents the
magnitude of the correlation between current values and
previous lagged values, and the y-axis represents the number
of lags. Both ACF and PACF are crucial diagnostic tools in
time series analysis that provides information about the
underlying structure of the data, by showing the relationship
between a time series and its lagged values. ACF measures
both direct and indirect relationships between the time series
and its lagged values, while PACF only measures the direct
relationship.
The ACF of inflation and interest rates in Fig. 2 and Fig.
3 show a gradual decline or tail-off. The ACF of inflation
shows a decline until lag 20, followed by fluctuations,
indicating a seasonal pattern in inflation. On the other hand,
the seasonal pattern is not as prominent in the ACF of interest
rates due to a decline followed by a constant value. Both data
are modeled with MA(0) because there is no statistically
significant order in the MA component of the model.
Meanwhile the PACF analysis in Fig. 2 and Fig.3 both
show a sharp decline or cut-off, leading to the selection of the
lag before the cut-off. For inflation, the PACF shows a cut-
off at lag-3, leading to the selection of lag-2 due to the
significant correlation at the lag before the cut-off. For
interest rates, the PACF shows a cut-off at lag-8, leading to
the selection of lag-7 as the order p in the AR component of
the model. Thus, the combination of AR(7) and MA(0) is
considered the optimal order for the model.
The essence of using the Akaike Information Criteria
(AIC) is to determine the best fit model among several
models, for a given dataset. In the vector-ARMA modeling
approach, AIC is commonly used as a criterion for choosing
the best model by incorporating the trade-off between the
model's goodness of fit and model’s complexity. With the
general form of AIC value is shown as follow [11]:
2 2!" # (4)
As expressed by Equation (4), the likelihood value of a
specific Vector Autoregressive Moving Average (VARMA)
is represented by L, and k stands for the number of estimated
parameters in the VARMA model.
TABLE III. AIC RESULTS FOR VARIOUS COMBINATION ORDERS to assess the model’s stability and resilience across different
OF VARMA
splits. The proportion ratio selection in the scenario was set
VARMA(p,q)
for the purpose of testing performance in periods with high
AIC Values
order
VARMA(1,0) 888.2
fluctuations. Given that there was a significant decline in the
VARMA(2,0) 734.3
mid-2019 to 2020 period due to the COVID-19 pandemic and
VARMA(3,0) 731.31
a high increase in 2022 of 4%.
VARMA(4,0) 727.4
TABLE IV. SPLIT DATA SCENARIO
VARMA(5,0) 724.1
VARMA(6,0) 726.17 Split Data Train Data Test Data
VARMA(7,0) 741.65
95:5 260 Months 14 Months
90:10 246 Months 28 Months
Table III shows the possible AIC for VARMA model.
The optimal regression model, as determined by the AIC 85:15 232 Months 42 Months
method, is the one that has the lowest AIC value. In this case,
the VARMA(5,0) of VAR(5) model was chosen as it had the TABLE V. RESULT FOR INFLATION’S EQUATION ON 95:5 SPLIT
lowest AIC value, this means that the Vector-AR model SCENARIO
created is a trend stationary VAR(5) model.
Parameter Coefficient Std Error Z P > |z|
VARMA model is a widely used method for predicting
multiple variables and understanding the dynamic Intercept 0.8103 0.609 1.330 0.184
relationships between time series data. The VARMA model Drift -0.0022 0.002 -1.050 0.294
is a combination of the VAR (Vector Autoregression) and the L1.inflation 1.0418 0.069 15.039 0.000*
VMA (Vector Moving Average) models, thus the general
L1.interest_rate 1.1365 0.248 4.591 0.000*
notation of VARMA is obtained as follows [9]:
L2.inflation -0.3411 0.137 -2.486 0.013*

$ μ ϕ$ ⋯ ϕ' $ ' ε θε ⋯ θ* ε * (5)

L2.interest_rate -1.1210 0.579 -1.938 0.053
L3.inflation 0.2176 0.189 1.151 0.250
L3.interest_rate 0.2167 0.802 0.270 0.787
As illustrated by Equation (5), There are µ represents a
vector of intercept with dimension n x 1, ε is the residual L4.inflation -0.0340 0.162 -0.210 0.834
vector with dimension n x 1, known as white noise. Then ϕ L4.interest_rate 0.0005 0.731 0.001 0.999
is the coefficient vector of the VAR model and θ is the L5.inflation -0.0157 0.080 -0.195 0.846
coefficient vector of the VMA model with dimension n x n. L5.interest_rate -0.1927 0.388 -0.496 0.620
n represent how many input data is in the model. By applying
the nature of the data as a trend stationary, in the formula, a ε(inflation) 0.9017 0.028 32.131 0.000*
linear time trend is added. Or as described by Equation (3), µ
take the form of a linear trend, μ =
TABLE VI. RESULT FOR INFLATION’S EQUATION ON 90:10 SPLIT
Based on the lowest AIC value, VARMA(5,0) or SCENARIO
VAR(5) model is chosen and applied to a trend stationary
Parameter Coefficient Std Error Z P > |z|
data, resulting in a trend stationary VAR(5) equation which
can be derived as Equation (6): Intercept 0.7769 0.645 1.205 0.228
Drift -0.0020 0.002 -0.876 0.381
- L1.inflation 1.0435 0.073 14.261 0.000*

$ μ μ + ϕ, $ , ε (6) L1.interest_rate 1.1438 0.263 4.345 0.000*

,. L2.inflation -0.3428 0.246 -2.355 0.019*
The stationary trend VAR(5) model on the data can L2.interest_rate -1.1393 0.616 -1.849 0.064
predict future inflation values while considering the declining L3.inflation 0.2193 0.201 1.093 0.274
trend in Indonesian inflation data and also taking into account L3.interest_rate 0.2327 0.853 0.273 0.785
fluctuations in previous data. Adding a trend variable to the
L4.inflation -0.0345 0.172 -0.201 0.841
model can help the model capture the data structure in the
long term, which is usually performed by the MA component L4.interest_rate -0.0153 0.776 -0.020 0.984
in the VARMA model. Therefore, when the VAR(5) model L5.inflation -0.0167 0.085 -0.196 0.844
is obtained as the most optimal model based on the smallest L5.interest_rate -0.1808 0.411 -0.440 0.660
AIC value, the model is considered efficient in terms of
ε(inflation) 0.9278 0.031 30.199 0.000*
performance and simpler compared to other VARMA models
or the addition of an MA component in the VAR model.
TABLE VII. RESULT FOR INFLATION’S EQUATION ON 85:15 SPLIT
SCENARIO
III. RESULT AND DISCUSSION
Parameter Coefficient Std Error Z P > |z|
The 3 data split scenarios were chosen to observe the
Intercept 0.7785 0.689 1.131 0.258
impact of training data proportion on model performance and

Authorized licensed use limited to: Institut Teknologi Bandung. Downloaded on November 14,2023 at 03:19:27 UTC from IEEE Xplore. Restrictions apply.
211
 Drift -0.0019 0.002 -0.776 0.438
L1.inflation 1.0433 0.079 13.189 0.000*
L1.interest_rate 1.1212 0.283 3.968 0.000*
L2.inflation -0.3392 0.157 -2.156 0.031*
L2.interest_rate -1.1318 0.663 -1.708 0.088
L3.inflation 0.2193 0.214 1.025 0.305
L3.interest_rate 0.2198 0.912 0.241 0.810
L4.inflation -0.0336 0.181 -0.185 0.853
L4.interest_rate 0.0026 0.832 0.003 0.998
L5.inflation -0.0189 0.090 -0.209 0.835
L5.interest_rate -0.1743 0.439 -0.397 0.691
ε(inflation) 0.9550 0.034 27.940 0.000*
Fig. 6. Prediction results of inflation using VAR(5) model on 90:10 data
split
The presented tables display coefficients, standard errors
(Std error), z-scores (z), and the significance of each
coefficient (P >|z|) derived from the VAR model. These four
values facilitate the identification of predictor variables
(parameters) that hold statistical significance when predicting
the response variable, providing estimates of the strength and
direction of their respective relationships. The coefficients of
each parameter represent the expected alteration in the
response variable for a one-unit shift in the predictor variable.
The standard error is a measure of the variability of the
estimated coefficient for each variable and lag, where a
smaller standard error indicates that the estimate of the
coefficient is more precise.
The z-score measures the number of standard deviations
that the coefficient is away from zero, it is calculated by Fig. 7. Prediction results of inflation using VAR(5) model on 85:15 data
dividing the coefficient by its standard error. This means that split
a higher z-score and a smaller standard error indicate a more
significant and reliable relationship between the predictor The above figures illustrate the actual data and prediction
variable (parameters) and the response variable. P > |z| results of the three scenarios. In Fig. 4, which is scenario 1,
represents the probability of obtaining a z-score as extreme or from September 2021 to October 2022, the model shows fairly
more extreme than the observed one. A calculated z-score good results, especially during the period of September 2021
greater than 1.96 or less than -1.96 (outside the range of -1.96 to January 2022, where the prediction almost matches the
to 1.96) indicates a statistically significant result with a P > |z| actual data. However, starting from March 2022, the
(P-value) less than 0.05, leading to the rejection of the null prediction is always below the actual data, although not
hypothesis. The threshold of 1.96 is based on a 95% significantly. In Fig. 5, which is scenario 2, from July 2020 to
confidence level, commonly used in hypothesis testing. October 2022, except for the period of March 2022 onwards,
the model works well because the model successfully
generates predictions that closely resemble the inflation
fluctuation trend during that period (July 2020 to January
2022). In Fig. 6, which is scenario 3, from May 2019 to
October 2022, the model works well. However, like the other
scenarios, there are some model periods that are late in
generating predictions of decreases or increases.
Based on the results, the model’s prediction is accurate
when there are minimal fluctuations in inflation movements
over time. However, sudden and significant changes in
inflation (either increases or decreases) can adversely impact
the model's performance as it is slow to react to such changes.
For instance, a notable increase of approximately 4% in
inflation occurred in just 10 months from January to October
Fig. 5. Prediction results of inflation using VAR(5) model on 95:5 data split 2022. In contrast, from mid-2020 to the end of 2021, inflation
movements were stagnant at around 1.5%-2% and fluctuated
mildly.

Authorized licensed use limited to: Institut Teknologi Bandung. Downloaded on November 14,2023 at 03:19:27 UTC from IEEE Xplore. Restrictions apply.
212
 Based on the obtained MAPE values from each scenario,
scenario 1 (Fig. 5) with a data split ratio of 95:5 shows a higher
MAPE value than other scenarios as most of the data is present
during a time of significant sudden fluctuations, leading to a
decrease in the model's performance. In contrast, scenario 2
(Fig. 6) and scenario 3 (Fig. 7) with a data split ratio of 90:10
and 85:15 include data from both periods of significant sudden
fluctuations and mild fluctuations, such as the period between
July 2020 and January 2022. Consequently, the model's
MAPE value is lower, indicating that it predicts well over a
more extended period.
The decrease in model performance during certain periods
indicates that the model is unable to capture sudden changes
in the underlying inflation structure or shocks that are not
reflected in the training data. In general, the natural nature of
inflation movements is unpredictable and unavoidable, such
as sudden changes in inflation during the COVID-19
pandemic phenomenon in early 2020. Moreover, to enhance
the model's performance in capturing these sudden changes,
exogenous variables other than interest rates or nonlinear
terms could be incorporated. Nonetheless, this modification
elevates the model's complexity and compromises its
interpretability, presenting a trade-off.
In order to support the performance of the generated
VAR(5) model and to see the impact of interest rate used on
the prediction result, a univariate counterpart, the ARMA
model is selected as the comparison model. The process of
creating the ARMA model involves conducting the ADF test
to test the presence of stationary trend in the data, selecting the
ARMA order parameter, which is selected based on its AIC
value, and creating an ARMA model for each data split
scenario. Based on the AIC value of each order combination
in the ARMA model, the ARMA(2,10) model was chosen,
meaning the AR(2) and MA(10) models were used.
TABLE VIII. COMPARISON OF PERFORMANCE RESULTS
BETWEEN VARMA AND ARMA
Split Data Scenario
MAPE
95:5 90:10 85:15
VARMA(5,0) 12.6% 12.2% 10.2%
ARMA(2,10) 13.7% 13.8% 11.9%
After obtaining inflation predictions using the VAR
model, the calculation of the MAPE value for each data split
scenario was carried out in Table VIII. Based on the MAPE
value for each scenario, it can be said that the VAR model can
predict more optimally compared to the ARMA model, with
MAPE values that do not have a significant difference.
Among the three scenarios, the 85:15 split scenario was
chosen as the scenario with the best prediction results or the
lowest MAPE value compared to the 95:5 and 90:10 split
scenarios.
IV. CONCLUSION
Based on the results and analysis of the study above, it
can be concluded that creating a VARMA model for inflation
prediction can involve interest rates based on the strong
Granger relationship of interest rates to inflation.
Additionally, there is a strong relationship between the two,
Authorized licensed use limited to: Institut Teknologi Bandung. Downloaded on November 14,2023 at 03:19:27 UTC from IEEE Xplore. Restrictions apply.
213
as seen from the high correlation and long-term relationship
or cointegration. The chosen VARMA model is the trend
stationary VARMA (5,0) or VAR(5) model based on the
lowest AIC value of 724.1.
The performance of the VAR model in each scenario is
slightly more optimal than the ARMA model according to the
MAPE values, with a difference of 1 - 1.7% smaller in each
VAR model. With a smaller MAPE value, it can be concluded
that the use of interest rates can slightly improve the
performance of the model in predicting inflation. The VAR
model produces the most optimal predictions in the 85:15
data split scenario with a MAPE value of 10.2%.
To improve future research, we suggest several ideas. To
handle bigger fluctuations, we propose a model that combines
extreme value-at-risk prediction and a seasonal model to
account for seasonal factors in the data. Additionally, to
enhance the model's performance in capturing these sudden
changes, exogenous variables other than interest rates or
nonlinear terms could be incorporated. In the context of VAR
models, introducing nonlinear terms might involve utilizing
logarithmic, exponential, trigonometric, or polynomial
functions to capture the nonlinearity that exists between
variables.
REFERENCES
[1] Fitriani, Efi. 2019. “Analysis of inflation and interest rates on the
economic growth in Indonesia”. JBFEM 2 (2):177-88.
[2] Y. Z. D. K. Jan Hatzius, Daan Struyven. Macro outlook 2023: this cycle
is different, 2022.
[3] Pratama, Naufal Amiruddin, Aniq A. Rohmawati, and Annisa
Aditsania. "Estimating the upper limit of daily number of COVID-19
cases in West Java using vector autoregressive model." In 2021
International Conference Advancement in Data Science, E-learning
and Information Systems (ICADEIS), pp. 1-5. IEEE, 2021.
[4] I. N. D. Pradnyandita. “Electronic money transactions forecasting with
support vector regression (SVR) and vector autoregressive moving
average (VARMA).” International Journal on Information and
Communication Technology (IJoICT), 8(1):69–85, 2022.
[5] C. Hiemstra and J. D. Jones. “Testing for linear and nonlinear granger
causality in the stock price-volume relation.” The Journal of Finance,
49(5):1639–1664, 1994.
[6] Greene William H. Econometric analysis. 5th ed. 2002.
[7] M. P. Clements and D. F. Hendry. “Forecasting with difference-
stationary and trend-stationary models.” The Econometrics Journal,
4(1):1–19, 2001.
[8] H. Lutkepohl. “Forecasting with varma models.” Handbook of
economic forecasting, 1:287–325, 2006.
[9] H. Lutkepohl. New introduction to multiple time series analysis. 2005.
[10] Russel, E., Pratama, D. N., Wamiliana, W., & Usman, M. (2022).
“Analysis of data inflation energy and gasoline price by vector
autoregressive model.” International Journal of Energy Economics and
Policy, 12(2), 120-126.
[11] Raudiya, Fikka, Aniq A. Rohmawati, and Didit Adytia. "Non-
stationary order of vector autoregression in significant ocean wave
forecasting." In 2021 9th International Conference on Information and
Communication Technology (ICoICT), pp. 326-330. IEEE, 2021.
[12] AMISI, Pascal Ouma. "Forecasting Kenya’s inflation rate using a
VARMA for price of imported crude oil and Kenya’s previous inflation
rate time series." PhD diss., Maseno university, 2021.
[13] Farida, E., & As' ad, M. (2021). “The forecasting of monthly inflation
in Malang City using an autoregressive integrated moving average.”
International Journal of Economics, Business and Accounting
Research (IJEBAR), 5(2).