Neural Networks in Finance

7 Inflation and Deflation: Hong Kong and Japan

This chapter applies neural network methods to the Hong Kong and Japanese experiences of inflation and deflation. Understanding the dynamics of inflation and how to forecast inflation more accurately is not simply of interest to policymakers at a central bank. Proper pricing of rates of return over the medium-term horizon requires accurate estimates of inflation in the coming quarters. Similarly, many decisions about lending or borrowing at short- or long-term interest rates requires a reasonable forecast of what succeeding short-term interest rates will be. These short-term interest rates, of course, will likely follow future inflationary developments, if the central bank is doing its job as a ...