On the forecasting ability of ARFIMA models when infrequent breaks occur

Recent research has focused on the links between long memory and structural breaks, stressing the memory properties that may arise in models with parameter changes. In this paper, we question the implications of this result for forecasting. We contribute to this research by comparing the forecasting abilities of long memory and Markov switching models. Two approaches are employed: the Monte Carlo study and an empirical comparison, using the quarterly Consumer Price inflation rate in Portugal in the period 1968--1998. Although long memory models may capture some in-sample features of the data, we find that their forecasting performance is relatively poor when shifts occur in the series, compared to simple linear and Markov switching models. Copyright Royal Economic Socciety 2004