On the Conditional Distribution of Euro Area Inflation Forecast

35 Pages Posted: 26 Jan 2016

Date Written: July 21, 2015

Abstract

The paper uses dynamic quantile regressions to estimate and forecast the conditional distribution of euro-area inflation. As in a Phillips curve relationship we assume that inflation quantiles depend on past inflation, the output gap, and other determinants, namely oil prices and the exchange rate. We find significant time variation in the shape of the distribution. Overall, the quantile regression approach describes the distribution of inflation better than a benchmark univariate trend-cycle model with stochastic volatility, which is known to perform very well in forecasting inflation. In an out-of-sample prediction exercise, the quantile regression approach provides forecasts of the conditional distribution of inflation that are superior, overall, to those produced by the benchmark model. Averaging the distribution forecasts of the different models improves robustness and in some cases results in the greatest accuracy of distributional forecasts.

Keywords: quantile regression, Phillips curve, time-varying distribution

JEL Classification: C32, E31, E37

Suggested Citation

Busetti, Fabio and Caivano, Michele and Rodano, Maria Lisa, On the Conditional Distribution of Euro Area Inflation Forecast (July 21, 2015). Bank of Italy Temi di Discussione (Working Paper) No. 1027, Available at SSRN: https://ssrn.com/abstract=2722440 or http://dx.doi.org/10.2139/ssrn.2722440

Fabio Busetti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
39 06 479 23245 (Phone)
39 06 474 7820 (Fax)

Michele Caivano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Maria Lisa Rodano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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