Leveraging Structural Insights: Enhancing Inflation Forecasting With Dynamic Stochastic General Equilibrium‐Informed Long Short‐Term Memory Models

ABSTRACT This study investigates the use of long short‐term memory (LSTM) models for forecasting US inflation, integrating structural insights from the Federal Reserve Bank of New York dynamic stochastic general equilibrium (FRBNY DSGE) model to enhance both accuracy and theoretical grounding. Traditional models often struggle with the complexities of macroeconomic dynamics, while machine learning models like LSTM excel at capturing nonlinear relationships but lack interpretability. By using the DSGE model to guide variable selection, this research incorporates key economic sectors into the LSTM framework. An incremental analysis reveals that financial market variables, particularly credit spreads, significantly improve forecasting performance, while government‐related variables contribute minimally and may reduce model reliability. The out‐of‐sample forecasting exercise demonstrates that the LSTM model produces projections more aligned with historical inflation patterns compared with the DSGE model, which often oversimplifies macroeconomic fluctuations. These findings highlight the potential of combining machine learning techniques with economic theory to create robust and reliable forecasting tools. The proposed approach not only enhances the accuracy of inflation forecasts but also provides a practical framework for central banks and financial institutions aiming to refine their models by leveraging the strengths of machine learning within a theoretically consistent structure. This integration represents a valuable advancement in macroeconomic forecasting methodologies.

Authors

Institutions

Publication Details

Journal
Journal of Forecasting
Published
2026-05-11
DOI
https://doi.org/10.1002/for.70174
Primary Topic
Stock Market Forecasting Methods
Type
article
Field-Weighted Citation Impact
0.00
Controls
|||
ALL TIME
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
article

Leveraging Structural Insights: Enhancing Inflation Forecasting With Dynamic Stochastic General Equilibrium‐Informed Long Short‐Term Memory Models

Huaguan Li, Langfeng Zhou
Journal of Forecasting
Stock Market Forecasting Methods
article

Leveraging Structural Insights: Enhancing Inflation Forecasting With Dynamic Stochastic General Equilibrium‐Informed Long Short‐Term Memory Models

Huaguan Li, Langfeng Zhou
article en

Abstract

ABSTRACT This study investigates the use of long short‐term memory (LSTM) models for forecasting US inflation, integrating structural insights from the Federal Reserve Bank of New York dynamic stochastic general equilibrium (FRBNY DSGE) model to enhance both accuracy and theoretical grounding. Traditional models often struggle with the complexities of macroeconomic dynamics, while machine learning models like LSTM excel at capturing nonlinear relationships but lack interpretability. By using the DSGE model to guide variable selection, this research incorporates key economic sectors into the LSTM framework. An incremental analysis reveals that financial market variables, particularly credit spreads, significantly improve forecasting performance, while government‐related variables contribute minimally and may reduce model reliability. The out‐of‐sample forecasting exercise demonstrates that the LSTM model produces projections more aligned with historical inflation patterns compared with the DSGE model, which often oversimplifies macroeconomic fluctuations. These findings highlight the potential of combining machine learning techniques with economic theory to create robust and reliable forecasting tools. The proposed approach not only enhances the accuracy of inflation forecasts but also provides a practical framework for central banks and financial institutions aiming to refine their models by leveraging the strengths of machine learning within a theoretically consistent structure. This integration represents a valuable advancement in macroeconomic forecasting methodologies.

Journal of Forecasting
Louisiana State University (US)
Decent work and economic growth
Openalex Percentile: Top 5%
Stock Market Forecasting Methods
AI Navigator

Ask Laika to Summarize, Analyze, and Connect papers live on the map.

Summarize Papers & Methodologies

Extract key findings, datasets, and comparative methods across publications.

Benchmark Rankings & Visual Analytics

Rank top research institutions, authors, funders, topics, and journals by Field-Weighted Citation Impact (FWCI) and paper volume with instant charts.

Connect Distant Disciplines

Bridge topological clusters on the map to find hidden collaborative intersections.