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Short-Term Inflation Projections: a Bayesian Vector Autoregressive approach

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  • Giannone, Domenico
  • Lenza, Michele
  • Momferatou, Daphne
  • Onorante, Luca

Abstract

In this paper, we construct a large Bayesian Vector Autoregressive model (BVAR) for the Euro Area that captures the complex dynamic inter-relationships between the main components of the Harmonized Index of Consumer Price (HICP) and their determinants. The model is estimated using Bayesian shrinkage. We evaluate the model in real time and find that it produces accurate forecasts. We use the model to study the pass-through of an oil shock and to study the evolution of inflation during the global financial crisis.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7746.

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Date of creation: Mar 2010
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Handle: RePEc:cpr:ceprdp:7746

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Keywords: Bayesian VAR; Forecast; Inflation;

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References

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  1. De Mol, Christine & Giannone, Domenico & Reichlin, Lucrezia, 2006. "Forecasting using a large number of predictors: is Bayesian regression a valid alternative to principal components?," Discussion Paper Series 1: Economic Studies 2006,32, Deutsche Bundesbank, Research Centre.
  2. D’Agostino, Antonello & Giannone, Domenico & Surico, Paolo, 2006. "(Un)Predictability and macroeconomic stability," Working Paper Series 0605, European Central Bank.
  3. Banbura, Marta & Giannone, Domenico & Reichlin, Lucrezia, 2007. "Bayesian VARs with Large Panels," CEPR Discussion Papers 6326, C.E.P.R. Discussion Papers.
  4. Kadiyala, K. Rao & Karlsson, Sune, 1994. "Numerical Aspects of Bayesian VAR-modeling," Working Paper Series in Economics and Finance 12, Stockholm School of Economics.
  5. James H. Stock & Mark W. Watson, 2008. "Phillips curve inflation forecasts," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 53.
  6. Daniel F. Waggoner & Tao Zha, 1999. "Conditional Forecasts In Dynamic Multivariate Models," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 639-651, November.
  7. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986. "Forecasting and conditional projection using realistic prior distribution," Staff Report 93, Federal Reserve Bank of Minneapolis.
  8. Marta Bańbura, 2008. "Large Bayesian VARs," 2008 Meeting Papers 334, Society for Economic Dynamics.
  9. Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
  10. John C. Robertson & Ellis W. Tallman, 1999. "Vector autoregressions: forecasting and reality," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 4-18.
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