Real Time Forecasts of Inflation: The Role of Financial Variables

21 Pages Posted: 5 Sep 2008

Multiple version iconThere are 3 versions of this paper

Date Written: August 21, 2008

Abstract

We present a mixed frequency model for daily forecasts of euro area inflation. The model combines a monthly index of core inflation with daily data from financial markets; estimates are carried out with the MIDAS regression approach. The forecasting ability of the model in real time is compared with that of standard VARs and of daily quotes of economic derivatives on euro area inflation. We find that the inclusion of daily variables helps to reduce forecast errors with respect to models that consider only monthly variables. The mixed frequency model also displays superior predictive performance with respect to forecasts solely based on economic derivatives.

Keywords: forecasting inflation, real time forecasts, dynamic

JEL Classification: C13, C51, C53, E37, G19

Suggested Citation

Monteforte, Libero and Moretti, Gianluca, Real Time Forecasts of Inflation: The Role of Financial Variables (August 21, 2008). Available at SSRN: https://ssrn.com/abstract=1263272 or http://dx.doi.org/10.2139/ssrn.1263272

Libero Monteforte (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Gianluca Moretti

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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