The Time-Varying Evolution of Inflation Risks

55 Pages Posted: 8 Oct 2021

See all articles by Dimitris Korobilis

Dimitris Korobilis

University of Glasgow

Bettina Landau

European Central Bank (ECB)

Alberto Musso

European Central Bank (ECB)

Anthoulla Phella

European Central Bank (ECB)

Date Written: October 1, 2021

Abstract

This paper develops a Bayesian quantile regression model with time-varying parameters (TVPs) for forecasting inflation risks. The proposed parametric methodology bridges the empirically established benefits of TVP regressions for forecasting inflation with the ability of quantile regression to model flexibly the whole distribution of inflation. In order to make our approach accessible and empirically relevant for forecasting, we derive an efficient Gibbs sampler by transforming the state-space form of the TVP quantile regression into an equivalent high-dimensional regression form. An application of this methodology points to a good forecasting performance of quantile regressions with TVPs augmented with specific credit and money-based indicators for the prediction of the conditional distribution of inflation in the euro area, both in the short and longer run, and specifically for tail risks.

Keywords: Bayesian shrinkage, euro area, Horseshoe, inflation tail risks, MCMC, quantile regression, time-varying parameters

JEL Classification: C11, C22, C52, C53, C55, E31, E37, E51

Suggested Citation

Korobilis, Dimitris and Landau, Bettina and Musso, Alberto and Phella, Anthoulla, The Time-Varying Evolution of Inflation Risks (October 1, 2021). ECB Working Paper No. 2021/2600, Available at SSRN: https://ssrn.com/abstract=3938628 or http://dx.doi.org/10.2139/ssrn.3938628

Dimitris Korobilis (Contact Author)

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Bettina Landau

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alberto Musso

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Anthoulla Phella

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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