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Factor Model Forecasting of Inflation in Croatia

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  • Davor Kunovac

    (Croatian National Bank, Zagreb)

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    Abstract

    This paper tests whether information derived from 144 economic variables (represented by only a few constructed factors) can be used for the forecasting of consumer prices in Croatia. The results obtained show that the use of one factor enhances the precision of the benchmark model’s ability to forecast inflation. The methodology used is sufficiently general to be able to be applied directly for the forecasting of other economic variables.

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    File URL: http://www.ijf.hr/eng/FTP/2007/4/kunovac.pdf
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    Bibliographic Info

    Article provided by Institute of Public Finance in its journal Financial Theory and Practice.

    Volume (Year): 31 (2007)
    Issue (Month): 4 ()
    Pages: 371-393

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    Handle: RePEc:ipf:finteo:v:31:y:2007:i:4:p:371-393

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    Related research

    Keywords: factor models; time series analysis; inflation; forecasting;

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    References

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    1. Giannone, Domenico & Reichlin, Lucrezia & Small, David, 2008. "Nowcasting: The real-time informational content of macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 665-676, May.
    2. Ben S. Bernanke & Jean Boivin, 2001. "Monetary Policy in a Data-Rich Environment," NBER Working Papers 8379, National Bureau of Economic Research, Inc.
    3. Matheson, Troy D, 2006. "Factor Model Forecasts for New Zealand," MPRA Paper 807, University Library of Munich, Germany.
    4. George Kapetanios & Gonzalo Camba-Mendez, 2005. "Forecasting euro area inflation using dynamic factor measures of underlying inflation," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(7), pages 491-503.
    5. Forni, Mario & Reichlin, Lucrezia, 1995. "Dynamic Common Factors in Large Cross-Sections," CEPR Discussion Papers 1285, C.E.P.R. Discussion Papers.
    6. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
    7. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc.
    8. Elena Angelini & Jérôme Henry & Ricardo Mestre, 2001. "Diffusion index-based inflation forecasts for the euro area," BIS Papers chapters, in: Bank for International Settlements (ed.), Empirical studies of structural changes and inflation, volume 3, pages 109-138 Bank for International Settlements.
    9. Boivin, Jean & Ng, Serena, 2005. "Understanding and Comparing Factor-Based Forecasts," MPRA Paper 836, University Library of Munich, Germany.
    10. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
    11. Banerjee, Anindya & Marcellino, Massimiliano & Masten, Igor, 2008. "Forecasting Macroeconomic Variables Using Diffusion Indexes in Short Samples with Structural Change," CEPR Discussion Papers 6706, C.E.P.R. Discussion Papers.
    12. George Kapetanios & Vincent Labhard & Simon Price, 2007. "Forecast combination and the Bank of England’s suite of statistical forecasting models," Bank of England working papers 323, Bank of England.
    13. Daniel Grenouilleau, 2006. "The Stacked Leading Indicators Dynamic Factor Model: A Sensitivity Analysis of Forecast Accuracy using Bootstrapping," European Economy - Economic Papers 249, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    14. Schumacher, Christian & Breitung, Jörg, 2006. "Real-time forecasting of GDP based on a large factor model with monthly and quarterly data," Discussion Paper Series 1: Economic Studies 2006,33, Deutsche Bundesbank, Research Centre.
    15. Ziegler, Christina & Eickmeier, Sandra, 2006. "How good are dynamic factor models at forecasting output and inflation? A meta-analytic approach," Discussion Paper Series 1: Economic Studies 2006,42, Deutsche Bundesbank, Research Centre.
    16. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
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    Cited by:
    1. Milena Lipovina-Božović, 2013. "A Comparison Of The Var Model And The Pc Factor Model In Forecasting Inflation In Montenegro," Economic Annals, Faculty of Economics, University of Belgrade, vol. 58(198), pages 115-136, July - Se.

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