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To aggregate or not to aggregate? Euro area inflation forecasting

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Author Info
Nicholai Benalal () (European Central Bank, Directorate General Economics)
Juan Luis Diaz del Hoyo () (European Central Bank, Directorate General Economics)
Bettina Landau () (European Central Bank, Directorate General Economics)
Moreno Roma () (European Central Bank, Directorate General Economics)
Frauke Skudelny () (European Central Bank, Directorate General Economics)
Abstract

In this paper we investigate whether the forecast of the HICP components (indirect approach) improves upon the forecast of overall HICP (direct approach) and whether the aggregation of country forecasts improves upon the forecast of the euro-area as a whole, considering the four largest euro area countries. The direct approach provides clearly better results than the indirect approach for 12 and 18 steps ahead for the overall HICP, while for shorter horizons the results are mixed. For the euro area HICP excluding unprocessed food and energy (HICPX), the indirect forecast outperforms the direct whereas the differences are only marginal for the countries. The aggregation of country forecasts does not seem to improve upon the forecast of the euro area HICP and HICPX. This result has however to be taken with caution as differences appear to be rather small and due to the limited country coverage.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 374.

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Length: 65 pages
Date of creation: Jul 2004
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Handle: RePEc:ecb:ecbwps:20040374

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Related research
Keywords: Forecasting short-term inflation; HICP sub-components/aggregation; Bayesian VARs; Model Selection;

Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation

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References listed on IDEAS
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  1. 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. [Downloadable!]
    Other versions:
  2. Meyler, Aidan & Kenny, Geoff & Quinn, Terry, 1998. "Forecasting irish inflation using ARIMA models," MPRA Paper 11359, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Kirstin Hubrich, 2003. "Forecasting euro area inflation: does aggregating forecasts by HICP component improve forecast accuracy?," Working Paper Series 247, European Central Bank. [Downloadable!]
    Other versions:
  4. Ard Reijer & Peter Vlaar, 2006. "Forecasting Inflation: An Art as Well as a Science!," De Economist, Springer, vol. 154(1), pages 19-40, 03. [Downloadable!] (restricted)
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  5. Thomas Doan & Robert Litterman & Christopher Sims, 1984. "Forecasting and conditional projection using realistic prior distributions," Econometric Reviews, Taylor and Francis Journals, vol. 3(1), pages 1-100. [Downloadable!] (restricted)
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  6. Jonas D. M. Fisher & Chin Te Liu & Ruilin Zhou, 2002. "When can we forecast inflation?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 32-44. [Downloadable!]
  7. Marcellino, Massimiliano & Stock, James H. & Watson, Mark W., 2003. "Macroeconomic forecasting in the Euro area: Country specific versus area-wide information," European Economic Review, Elsevier, vol. 47(1), pages 1-18, February. [Downloadable!] (restricted)
    Other versions:
  8. Kenny, Geoff & Meyler, Aidan & Quinn, Terry, 1998. "Bayesian VAR Models for Forecasting Irish Inflation," MPRA Paper 11360, University Library of Munich, Germany. [Downloadable!]
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  9. Dr. Peter Kenning & Hilke Plassmann, 2004. "NeuroEconomics," Experimental 0412005, EconWPA. [Downloadable!]
  10. Friedrich Fritzer & Gabriel Moser & Johann Scharler, 2002. "Forecasting Austrian HICP and its Components using VAR and ARIMA Models," Working Papers 73, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gabriel Moser & Fabio Rumler & Johann Scharler, 2004. "Forecasting Austrian Inflation," Working Papers 91, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
    Other versions:
  2. Rebeca Albacete & Antoni Espasa, 2005. "Forecasting Inflation In The Euro Area Using Monthly Time Series Models And Quarterly Econometric Models," Statistics and Econometrics Working Papers ws050401, Universidad Carlos III, Departamento de Estadística y Econometría. [Downloadable!]
  3. Janine Aron & John Muellbauer, 2008. "New methods for forecasting inflation and its sub-components: application to the USA," Economics Series Working Papers 406, University of Oxford, Department of Economics. [Downloadable!]
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