19 Pages Posted: 7 Feb 2002
Date Written: January 2002
The Paper uses a large data set, consisting of 447 monthly macroeconomic time series concerning the main countries of the Euro area to simulate out-of-sample predictions of the Euro area industrial production and the harmonized inflation index and to evaluate the role of financial variables in forecasting. We considered two models which allow forecasting based on large panels of time series: Forni, Hallin, Lippi, and Reichlin (2000, 2001c) and Stock and Watson (1999). Performance of both models was compared to that of a simple univariate AR model. Results show that multivariate methods outperform univariate methods for forecasting inflation at one, three, six, and twelve months and industrial production at one and three months. We find that financial variables do help forecasting inflation, but do not help forecasting industrial production.
Keywords: Dynamic factor models, principal components, business cycle, forecasting, financial variables
JEL Classification: C13, C33, C43
Suggested Citation: Suggested Citation
Forni, Mario and Hallin, Marc and Lippi, Marco and Reichlin, Lucrezia, Do Financial Variables Help Forecasting Inflation and Real Activity in the Euro Area (January 2002). CEPR Discussion Paper No. 3146. Available at SSRN: https://ssrn.com/abstract=299601
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File name: DP3146.
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