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Short-term inflation projections: a Bayesian vector autoregressive approach

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  • Domenico Giannone
  • Michèle Lenza
  • Daphné Momferatu
  • Luca Onorante

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 ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number ECARES 2010-011.

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Date of creation: Mar 2010
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Publication status: Published by: ECARES
Handle: RePEc:eca:wpaper:2010_011

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References

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  1. Antonello D'Agostino & Domenico Giannone & Paolo Surico, 2005. "(Un)Predictability and Macroeconomic Stability," Macroeconomics 0510024, EconWPA.
  2. Christine De Mol & Domenico Giannone & Lucrezia Reichlin, 2008. "Forecasting using a large number of predictors: is Bayesian shrinkage a valid alternative to principal components?," ULB Institutional Repository 2013/6411, ULB -- Universite Libre de Bruxelles.
  3. James H. Stock & Mark W. Watson, 2008. "Phillips Curve Inflation Forecasts," NBER Working Papers 14322, National Bureau of Economic Research, Inc.
  4. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
  5. 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.
  6. John C. Robertson & Ellis W. Tallman, 1999. "Vector autoregressions: forecasting and reality," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 4-18.
  7. Kadiyala, K Rao & Karlsson, Sune, 1997. "Numerical Methods for Estimation and Inference in Bayesian VAR-Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 99-132, March-Apr.
  8. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983. "Forecasting and Conditional Projection Using Realistic Prior Distributions," NBER Working Papers 1202, National Bureau of Economic Research, Inc.
  9. Marta Bańbura, 2008. "Large Bayesian VARs," 2008 Meeting Papers 334, Society for Economic Dynamics.
  10. Daniel F. Waggoner & Tao Zha, 1998. "Conditional forecasts in dynamic multivariate models," Working Paper 98-22, Federal Reserve Bank of Atlanta.
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Cited by:
  1. Genre, Véronique & Kenny, Geoff & Meyler, Aidan & Timmermann, Allan, 2010. "Combining the forecasts in the ECB survey of professional forecasters: can anything beat the simple average?," Working Paper Series 1277, European Central Bank.
  2. James H. Stock & Mark W. Watson, 2010. "Modeling Inflation After the Crisis," NBER Working Papers 16488, National Bureau of Economic Research, Inc.
  3. Giannone, Domenico & Lenza, Michele & Primiceri, Giorgio E, 2012. "Prior Selection for Vector Autoregressions," CEPR Discussion Papers 8755, C.E.P.R. Discussion Papers.
  4. Gary Koop & Dimitris Korobilis, 2012. "Large Time-Varying Parameter VARs," Working Paper Series 11_12, The Rimini Centre for Economic Analysis.
  5. James H. Stock & Mark W. Watson, 2010. "Modeling inflation after the crisis," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 173-220.
  6. Todd E. Clark & Saeed Zaman, 2011. "Food and energy price shocks: what other prices are affected?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.
  7. Gary, Koop, 2013. "Using VARs and TVP-VARs with Many Macroeconomic Variables," SIRE Discussion Papers 2013-35, Scottish Institute for Research in Economics (SIRE).
  8. Liebermann, Joelle, 2012. "Real-time forecasting in a data-rich environment," MPRA Paper 39452, University Library of Munich, Germany.
  9. Frank R. Smets, 2010. "Commetary: modeling inflation after the crisis," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 221-234.
  10. Carriero, Andrea & Clark, Todd & Marcellino, Massimiliano, 2011. "Bayesian VARs: Specification Choices and Forecast Accuracy," CEPR Discussion Papers 8273, C.E.P.R. Discussion Papers.
  11. Genre, Véronique & Kenny, Geoff & Meyler, Aidan & Timmermann, Allan, 2013. "Combining expert forecasts: Can anything beat the simple average?," International Journal of Forecasting, Elsevier, vol. 29(1), pages 108-121.
  12. Michele Lenza & Thomas Warmedinger, 2011. "A Factor Model for Euro-area Short-term Inflation Analysis," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 231(1), pages 50-62, February.

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