Real Time Forecasts of Inflation: The Role of Financial Variables

36 Pages Posted: 29 Oct 2010

Multiple version iconThere are 3 versions of this paper

Date Written: July 30, 2010

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 factor models, MIDAS regression, economic derivatives

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

Suggested Citation

Monteforte, Libero and Moretti, Gianluca, Real Time Forecasts of Inflation: The Role of Financial Variables (July 30, 2010). Bank of Italy Temi di Discussione (Working Paper) No. 767. Available at SSRN: https://ssrn.com/abstract=1699629 or http://dx.doi.org/10.2139/ssrn.1699629

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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