Forecasting Inflation Through a Bottom-Up Approach: The Portuguese Case
AbstractThe aim of this paper is to assess inflation forecasting acurracy over the short-term horizon using Consumer Price Index (CPI) disaggregated data. That is, aggregating forecasts is compared with aggregate forecasting. In particular, three questions are addressed: i) one should bottom-up or not, ii) how bottom one should go and iii) how one should model at the bottom. In contrast with the literature, di erent levels of data dis-aggregation are allowed, namely a higher disaggregation level than the one considered up to now. Moreover, both univariate and multivariate models are considered, such as SARIMA and SARIMAX models with dynamic common factors. An out-of-sample forecast comparison (up to twelve months ahead) is done using Portuguese CPI dataset. Aggregating the forecasts seems to be better than aggregate forecasting up to a five-months ahead horizon. Moreover, this improvement increases with the disaggregation level and the multivariate modelling outperforms the univariate one in the very short-run.
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Bibliographic InfoPaper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200502.
Date of creation: 2005
Date of revision:
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- 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: Models and Applications
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