Real time forecasts of inflation: the role of financial variables
AbstractWe present a mixed-frequency model for daily forecasts of euro area inflation. The model combines a monthly index of core inflation with daily data from financial markets; estimates are carried out with the MIDAS regression approach. The forecasting ability of the model in real-time is compared with that of standard VARs and of daily quotes of economic derivatives on euro area inflation. We find that the inclusion of daily variables helps to reduce forecast errors with respect to models that consider only monthly variables. The mixed-frequency model also displays superior predictive performance with respect to forecasts solely based on economic derivatives.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 767.
Date of creation: Jul 2010
Date of revision:
forecasting inflation; real time forecasts; dynamic factor models; MIDAS regression; economic derivatives;
Other versions of this item:
- Libero Monteforte & Gianluca Moretti, 2013. "Real‐Time Forecasts of Inflation: The Role of Financial Variables," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(1), pages 51-61, 01.
- Libero Monteforte & Gianluca Moretti, . "Real time forecasts of inflation: the role of financial variables," Working Papers wp2011-6, Department of the Treasury, Ministry of the Economy and of Finance.
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- G19 - Financial Economics - - General Financial Markets - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-14 (All new papers)
- NEP-CBA-2010-08-14 (Central Banking)
- NEP-ECM-2010-08-14 (Econometrics)
- NEP-EEC-2010-08-14 (European Economics)
- NEP-FOR-2010-08-14 (Forecasting)
- NEP-MAC-2010-08-14 (Macroeconomics)
- NEP-MON-2010-08-14 (Monetary Economics)
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- Cecilia Frale & Libero Monteforte, .
"FaMIDAS: A Mixed Frequency Factor Model with MIDAS structure,"
3, Department of the Treasury, Ministry of the Economy and of Finance.
- Cecilia Frale & Libero Monteforte, 2011. "FaMIDAS: A Mixed Frequency Factor Model with MIDAS structure," Temi di discussione (Economic working papers) 788, Bank of Italy, Economic Research and International Relations Area.
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- Michael Funke & Hao Yu & Aaron Mehrota, 2011.
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