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Forecasting euro area inflation: Does aggregating forecasts by HICP component improve forecast accuracy?

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Author Info
Kirstin Hubrich

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Abstract

Monitoring and forecasting price developments in the euro area is essential in light of the two-pillar framework of the ECB's monetary policy strategy. This study analyses whether the accuracy of forecasts of aggregate euro area inflation can be improved by aggregating forecasts of subindices of the Harmonized Index of Consumer Prices (HICP) as opposed to forecasting the aggregate HICP directly. The analysis includes univariate and multivariate linear time series models and distinguishes between different forecast horizons, HICP components and inflation measures. Various model selection procedures are employed to select models for the aggregate and the disaggregate components. The results indicate that aggregating forecasts by component does not necessarily help forecast year-on-year inflation twelve months ahead.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 230.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:230

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Related research
Keywords: euro area inflation; HICP subindex forecast aggregation; linear time series models;

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Find related papers by JEL classification:
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
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
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. Clark, Todd E. & McCracken, Michael W., 2001. "Tests of equal forecast accuracy and encompassing for nested models," Journal of Econometrics, Elsevier, vol. 105(1), pages 85-110, November. [Downloadable!] (restricted)
    Other versions:
  2. Hendry, David F & Michael P. Clements, 2002. "Economic Forecasting: Some Lessons from Recent Research," Royal Economic Society Annual Conference 2002 99, Royal Economic Society. [Downloadable!]
    Other versions:
  3. Canova, Fabio, 2002. "G-7 Inflation Forecasts," CEPR Discussion Papers 3283, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Fabio Canova, 2002. "G-7 inflation forecasts," Working Paper Series 151, European Central Bank. [Downloadable!]
  5. Michael P. Clements & David F. Hendry, 2002. "Modelling methodology and forecast failure," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 319-344, 06. [Downloadable!] (restricted)
  6. David F. Hendry & Michael P. Clements, 2004. "Pooling of forecasts," Econometrics Journal, Royal Economic Society, vol. 7(1), pages 1-31, 06. [Downloadable!] (restricted)
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  7. Elena Angelini & Jerome Henry & Ricardo Mestre, 2001. "Diffusion index-based inflation forecasts for the euro area," Working Paper Series 061, European Central Bank. [Downloadable!]
  8. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583. [Downloadable!] (restricted)
  9. Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262531895, January.
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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. Kirstin Hubrich & David F. Hendry, 2005. "Forecasting Aggregates by Disaggregates," Computing in Economics and Finance 2005 270, Society for Computational Economics. [Downloadable!]
  2. Olga Arratibel & Christophe Kamps & Nadine Leiner-Killinger, 2009. "Inflation forecasting in the new EU member states," Working Paper Series 1015, European Central Bank. [Downloadable!]
  3. Alistair Dieppe & Thomas Warmedinger, 2007. "Modelling intra- and extra-area trade substitution and exchange rate pass-through in the euro area," Working Paper Series 760, European Central Bank. [Downloadable!]
  4. repec:nos:tttehw:mechonomics4 is not listed on IDEAS
  5. 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!]
  6. Gerhard Rünstler & Franck Sédillot, 2003. "Short-term estimates of euro area real GDP by means of monthly data," Working Paper Series 276, European Central Bank. [Downloadable!]
  7. P.J.G. Vlaar & A.H.J. den Reijer, 2003. "Forecasting inflation: An art as well as a science!," DNB Staff Reports (discontinued) 107, Netherlands Central Bank. [Downloadable!]
    Other versions:
  8. Hendry, David F & Hubrich, Kirstin, 2006. "Forecasting Economic Aggregates by Disaggregates," CEPR Discussion Papers 5485, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Kirstin Hubrich & Kenneth D. West, 2008. "Forecast Evaluation of Small Nested Model Sets," NBER Working Papers 14601, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. 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!]
  11. John W. Galbraith & Greg Tkacz, 2007. "How Far Can Forecasting Models Forecast? Forecast Content Horizons for Some Important Macroeconomic Variables," Working Papers 07-1, Bank of Canada. [Downloadable!]
  12. Kitov, Ivan, 2007. "Inflation, unemployment, labor force change in European countries," MPRA Paper 14557, University Library of Munich, Germany. [Downloadable!]
  13. Carlos Capistrán & Christian Constandse & Manuel Ramos Francia, 2009. "Using Seasonal Models to Forecast Short-Run Inflation in Mexico," Working Papers 2009-05, Banco de México. [Downloadable!]
  14. Juan de Dios Tena & Antoni Espasa & Gabriel Pino, 2008. "Forecasting Spanish inflation using information from different sectors and geographical areas," Statistics and Econometrics Working Papers ws080101, Universidad Carlos III, Departamento de Estadística y Econometría. [Downloadable!]
  15. Nicholai Benalal & Juan Luis Diaz del Hoyo & Bettina Landau & Moreno Roma & Frauke Skudelny, 2004. "To aggregate or not to aggregate? Euro area inflation forecasting," Working Paper Series 374, European Central Bank. [Downloadable!]
  16. Ivan, Kitov, 2006. "Exact prediction of inflation in the USA," MPRA Paper 2735, University Library of Munich, Germany. [Downloadable!]
  17. Guenter Beck & Massimiliano Marcellino, 2006. "Regional Inflation Dynamics within and across Euro Area and a Comparison with the US," Computing in Economics and Finance 2006 338, Society for Computational Economics. [Downloadable!]
  18. A.H.J. den Reijer & P.J.G. Vlaar, 2003. "Forecasting Inflation in the Netherlands and the Euro Area," WO Research Memoranda (discontinued) 723, Netherlands Central Bank, Research Department. [Downloadable!]
  19. Helmut Luetkepohl, 2009. "Forecasting Aggregated Time Series Variables: A Survey," Economics Working Papers ECO2009/17, European University Institute. [Downloadable!]
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