Co-Evolving Neural Networks with evolutionary Strategies: A New Application to Divisia Money

This work applies state-of-the-art artificial intelligence forecasting methods to provide new evidence of the comparative performance of statistically weighted Divisia indices vis-a-vis their simple sum counterparts in a simple inflation forecasting experiment. We develop a new approach that uses co-evolution (using neural networks and evolutionary strategies) as a predictive tool. This approach is simple to implement yet produces results that outperform stand-alone neural network predictions. Results suggest that superior tracking of inflation is possible for models that employ a Divisia M2 measure of money that has been adjusted to incorporate a learning mechanism to allow individuals to gradually alter their perceptions of the increased productivity of money. Divisia measures of money outperform their simple sum counterparts as macroeconomic indicators.