Kwame Nkrumah University of

Science & Technology, Kumasi, Ghana

Forecasting the Ination rate of Ghana- A

Comparison of ARIMA, Exponential
Smoothing and Neural Network
Autoregressive
Michael Adonu
Department of Statistics and Actuarial Science
Faculty of Physical Sciences & College of Science
Outline of Presentation

1 Introduction
2 Problem Statement
3 Objectives
4 Methodology
5 Analysis
6 Conclusion

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Introduction

In reality ination means that your money cannot buy as much

as it could have bought yesterday, Ngailo et al. (2014)
It is therefore important that ination rate be kept stable even
when it is low.
The primary focus of monetary policy, both in Ghana and
elsewhere, has traditionally been the maintenance of a low and
stable rate of aggregate price ination.
Therefore modeling and forecasting the ination rate of Ghana
is important.
This study therefore seeks to compare three dierent
forecasting methods to select the most suitable one to forecast
the ination rate of Ghana

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Problem Statement

According to Hurtado and Cortes-Fregoso (2013), Ination

aects economic growth because investment projects become
riskier, distorts consuming and saving decisions, causes
unequal income distribution and also results in diculties in
nancial intervention.
In Croushore (1996), Investors need good ination forecasts,
since the returns to stocks and bonds depend on what happens
to ination.
To prevent these undesirable outcomes of price instability,
central banks require proper understanding of the future path
of ination to ensure policy credibility, King (2012).
Thus the question still remains, can the ination rate in Ghana
be predicted. If so what statistical method can best predict
the ination rate of Ghana.
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Objectives

The objectives of the study will be as follows:

To build a model for forecasting the ination rate of Ghana
To compare the forecasting ability of ARIMA, ETS and NNAR
To forecast the ination rate of Ghana using the most suitable
model.

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Methodology

The main method that is used in the study is the Box-Jenkins

methodology. This method involves four iterative stages which is as
follows:
Identify and plot the time series data.Transform the data(i.e.
make non-stationary data stationary.) e.g. dierence or log or
both
Model Identication ARIMA(p,d,q)
Parameter Estimation
Model Diagnostics
Forecast
We will also use the Exponential Smoothing(ETS) and Neural
Network Autoregressive(NNAR) methods.

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Analysis

The time series methods that were used in modelling the

ination rate of Ghana are the SARIMA, ETS and NNAR
For each forecasting method, appropriate forecasting models
are build and their various information criterion such as AIC's,
AICc's, and BIC's are recorded. The model with the least AIC,
AICc and BIC is chosen as the suitable model for each
forecasting method.
The suitable models under each of the forecasting method was
compared using the Root Mean Squared Error (RMSE) and
the model with the least RMSE was then selected as the most
suitable model for forecasting the ination rate of Ghana.
The data that was used for the analysis was a monthly data
spanning from January 2006 to December 2018 and was
downloaded from the Bank of Ghana website.
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Analysis Continued- ARIMA Model

For this model, we rst plot the ination time series data in order
to see the nature of our data.

Figure: Time series plot of monthly ination rate from Jan 2006 to Dec
2018

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Analysis Continued- ARIMA Model

Test For Stationarity

We employ the Augmented Dickey-Fuller(ADF) test to test for the
stationarity of the ination data.
After running the ADF test for the ination data, we had a p-value
of 0.1803 which is greater than 0.05, so we concludes that the
ination series is not stationary and therefore dierencing is
required. After the rst dierenced, we obtain a p-value of 0.01
which is less than 0.05, hence our data is now stationary.

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Analysis Continued- ARIMA Model

Model Selection For Original Data

In selecting the best suitable model, we used the auto.arima
function in R and build competing models around the model given
by the auto.arima function.
In using the original data with the auto.arima function, we had
SARIMA(2, 0, 1)(2, 0, 0)12 model. We then build several competing
models around SARIMA(2, 0, 1)(2, 0, 0)12 and selects the one with
the minimum AIC, AICc and BIC values.
The following table gives the various competing models together
with their AIC, AICc and BIC values.

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Analysis Continued- ARIMA Model
Model AIC AICc BIC
SARIMA(1, 0, 0)(1, 0, 0)12 -191.4 -190.82 -179.61
SARIMA(1, 0, 0)(2, 0, 0)12 -261.05 -260.57 -246.64
SARIMA(1, 0, 1)(1, 0, 0)12 -189.76 -189.28 -175.34
SARIMA(2, 0, 0)(1, 0, 0)12 -259.76 -259.09 -242.47
SARIMA(2, 0, 0)(2, 0, 0)12 -189.84 -189.36 -175.42
SARIMA(2, 0, 1)(1, 0, 0)12 -259.93 -259.26 -242.36
SARIMA(2, 0, 1)(1, 0, 0)12 -188.1 -187.43 -170.81
SARIMA(2, 0, 1)(2, 0, 0)12 * -263.25 -262.35 -243.08
SARIMA(2, 0, 2)(1, 0, 0)12 -186.1 -185.2 -243.08
SARIMA(2, 0, 2)(2, 0, 0)12 -258.62 -187.56 -170.94
SARIMA(3, 0, 0)(1, 0, 0)12 -188.23 -187.56 -239.35
SARIMA(3, 0, 0)(2, 0, 0)12 -259.35 -258.63 -170.94
SARIMA(3, 0, 1)(1, 0, 0)12 -186.24 -185.34 -166.06
SARIMA(3, 0, 1)(2, 0, 0)12 -262.3 -261.13 -239.24
Table: Competing Models and their AIC, AICc and BIC using original
ination series 11 / 23
Analysis Continued- ARIMA Model

Model Selection For Dierenced Data

Since our original data is not stationary, we then move ahead to
build another model using the rst dierenced data.
Again using the auto.arima function in R software together with the
rst dierenced data, we had SARIMA(0, 0, 0)(2, 0, 2) as our best
model for the rst dierenced data. We then build competing
models around SARIMA(0, 0, 0)(2, 0, 2) and selects the model with
the minimum AIC, AICc and BIC values.

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Analysis Continued- ARIMA Model

Model AIC AICc BIC

SARIMA(0, 0, 0)(1, 0, 0) 484.38 494.57 503
SARIMA(0, 0, 0)(2, 0, 0) 446.65 446.97 458.15
SARIMA(0, 0, 0)(3, 0, 0) 413.76 414.24 428.14
SARIMA(0, 0, 0)(1, 0, 1) 484.17 484.48 495.67
SARIMA(0, 0, 0)(1, 0, 2) 455.14 455.62 469.51
SARIMA(0, 0, 0)(1, 0, 3) 446.23 446.91 463.48
SARIMA(0, 0, 0)(1, 0, 4) 435.16 436.08 455.29
SARIMA(0, 0, 0)(2, 0, 1) 397.35 397.83 411.72
SARIMA(0, 0, 0)(2, 0, 2)* 378.43 379.10 397.68
SARIMA(0, 0, 0)(2, 0, 3) 379.51 380.42 399.64
Table: Competing models and their AIC, AICc and BIC values using
Dierenced Data

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Analysis Continued- ARIMA Model
Selection of Best ARIMA Model
We now used the Root Mean Square Error(RMSE) criterion to
select the most suitable ARIMA model.
Model RMSE
SARIMA(0, 0, 0)(2, 0, 2) 2.528
SARIMA(2, 0, 1)(2, 0, 0)12 2.314
Table: Comparing the RMSE of model for dierenced data and original
data

From the above table , the model for the original data has the least
RMSE of 2.314 as compared to that of the dierenced data of
2.528, hence the most suitable ARIMA model is
SARIMA(2, 0, 1)(2, 0, 0)12 .

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Analysis Continued- ETS Model

For the analysis for the exponential smoothing methods, several

exponential smoothing models were tted to the monthly ination
data. The various models that were tted either exhibits
multiplicative error or additive error.
From the table below which is a summary of the various competing
models and their AIC, AICc and BIC values, we have model MNA
as the most suitable model for modelling the ination data using
the exponential smoothing method. Model MNA is a multiplicative
error, none trend and additive seasonality model and hence is
Holt-Winters' seasonal method.

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Analysis Continued- ETS Model

Model AIC AICc BIC

ANN 784.5148 784.7059 793.1668
ANA 806.3974 810.5353 849.6394
MNN 839.9142 840.1017 848.5626
MNA 780.4056 784.5435 823.6476
MNM 830.6295 834.7674 873.8715
AAN 789.2587 789.7349 803.6727
MAN 839.8386 840.3148 854.2526
AAA 808.2453 813.6137 857.2530
MMM 796.5618 802.6149 848.4522
Table: Competing models using exponential smoothing method and their
AIC, AICc and BIC values

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Analysis Continued- NNAR Model

In modeling with Articial Neural Network, we had model

NNAR(1,1,2)[12] as the most suitable model for forecasting the
ination rate of Ghana.

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Analysis Continued-Comparison of Models

The table below gives the RMSE of the three forecasting methods
(ARIMA, ETS and NNAR) and the model with the least RMSE is
chosen as the most suitable model for forecasting the ination rate
of Ghana. SARIMA(2, 0, 1)(2, 0, 0)12 has the least RMSE of
2.31496 and hence the most suitable model for forecasting the
ination rate of Ghana.
Model RMSE
SARIMA(2, 0, 1)(2, 0, 0)12 2.31496
ETS(M,N,A) 9.047
NNAR(1,1,2) 4.437133
Table: Forecast Accuracy Measure of Competing Forecast Methods

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Analysis Continued- Parameter Estimates

For the second step of the Box-Jenkins methodology, we have to

estimate the values of the parameters for our chosen model. From
the table below, it is obvious that all the parameter values are
greater than 1.96 and hence is signicantly dierent from zero and
is approved for use in the model.
Variable Parameter Value Standard Error |z| Value
AR1 1.7682 0.0944 18.7309
AR2 -0.8139 0.0839 9.7008
MA1 -0.7922 0.1072 7.3899
SAR1 0.8313 0.0648 12.8287
SAR2 -0.8059 0.0510 15.8020
Table: Parameter Estimates of SARIMA(2, 0, 1)(2, 0, 0)12 with its
Standard Errors and |z| Values

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Analysis Continued-Diagnostic Checks

Figure: Plot of Residuals of SARIMA(2, 0, 1)(2, 0, 0)12

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Analysis Continued- Forecasting

Figure: Forecast plot of Ination from Jan 2019 to Dec 2020 using the
tted model 21 / 23
Conclusion

The aim of this study is to identify the most suitable statistical

method for forecasting the ination rate of Ghana. In order to
select the most suitable statistical method for forecasting the
ination rate of Ghana, three dierent statistical
methods(ARIMA, ETS and NNAR) were compared by using
the RMSE accuracy measure.
We compared the RMSE of each suitable model from each of
the three statistical method of forecasting.
SARIMA(2, 0, 1)(2, 0, 0)12 had a RMSE of 2.31496, model
ETS(MNA) had a RMSE of 9.047 and model
NNAR(1,1,2)[12] had a RMSE of 4.437133.
SARIMA(2, 0, 1)(2, 0, 0)12 had the least RMSE and hence the
most suitable model for forecasting the ination rate of Ghana.
SARIMA(2, 0, 1)(2, 0, 0)12 was then used to forecast the
ination rate of Ghana from January 2019 to December 2020.
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References
Ngailo, E., Luvanda, E. and Massawe, E. S. (2014). Time
series modelling with application to tanzania ination data,
Journal of Data Analysis and Information Processing 2(02):
49.
Hurtado, J. L. C. and Cortes-Fregoso, J. H. (2013).
Forecasting mexican ination using neural networks,
CONIELECOMP 2013, 23rd International Conference on
Electronics, Communications and Computing, IEEE, pp. 32-35.
Croushore, D. D. (1996). Ination forecasts: How good are
they?, Business Review-Federal Reserve Bank of Philadelphia
3: 15.
King, M. (2012). Monetary policy: Practice ahead of theory,
Issues in monetary policy: the relationship between money and
the nancial markets pp. 9-24.

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