Real Time Forecasts of Inflation: The Role of Financial Variables
36 Pages Posted: 29 Oct 2010
Date Written: July 30, 2010
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 factor models, MIDAS regression, economic derivatives
JEL Classification: C13, C51, C53, E37, G19
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