Forecasting Euro Area Inflation Using Targeted Predictors: Is Money Coming Back?

39 Pages Posted: 7 Feb 2017

See all articles by Matteo Falagiarda

Matteo Falagiarda

European Central Bank (ECB)

João Sousa

European Central Bank (ECB)

Date Written: February 6, 2017

Abstract

This paper sheds new light on the information content of monetary and credit aggregates for future price developments in the euro area. Overall, we find strong variation in the information content of these variables over time. We show that monetary and credit aggregates are very often selected among the top predictors of inflation, with their predictive power relative to other predictors generally improving in the post-2012 period. An out-of-sample forecasting exercise indicates that, when monetary and credit aggregates are loaded directly in the forecasting equation, the additional gains over the benchmark model are generally high and significant across horizons and HICP components only in the most recent period. When the forecasts are computed using factor-augmented regressions based on the best predictors, we confirm the importance of monetary and credit variables in forecasting inflation, even if their information content is diluted in a much broader pool of variables.

Keywords: money, inflation, forecasting, diffusion index, targeted predictors

JEL Classification: C53, E37, E41, E51, E58

Suggested Citation

Falagiarda, Matteo and Soucasaux Meneses e Sousa, João Miguel, Forecasting Euro Area Inflation Using Targeted Predictors: Is Money Coming Back? (February 6, 2017). ECB Working Paper No. 2015, Available at SSRN: https://ssrn.com/abstract=2912750 or http://dx.doi.org/10.2139/ssrn.2912750

Matteo Falagiarda (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

João Miguel Soucasaux Meneses e Sousa

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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