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Real time forecasts of inflation: the role of financial variables

Author

Listed:
  • Libero Monteforte

    () (Bank of Italy)

  • Gianluca Moretti

    () (Bank of Italy)

Abstract

We present a mixed-frequency model for daily forecasts of euro area inflation. The model combines a monthly index of core inflation with daily data from financial markets; estimates are carried out with the MIDAS regression approach. The forecasting ability of the model in real-time is compared with that of standard VARs and of daily quotes of economic derivatives on euro area inflation. We find that the inclusion of daily variables helps to reduce forecast errors with respect to models that consider only monthly variables. The mixed-frequency model also displays superior predictive performance with respect to forecasts solely based on economic derivatives.

Suggested Citation

  • Libero Monteforte & Gianluca Moretti, 2010. "Real time forecasts of inflation: the role of financial variables," Temi di discussione (Economic working papers) 767, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_767_10
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    Citations

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    Cited by:

    1. Elena Andreou & Eric Ghysels & Andros Kourtellos, 2013. "Should Macroeconomic Forecasters Use Daily Financial Data and How?," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(2), pages 240-251, April.
    2. Michael Funke & Aaron Mehrotra & Hao Yu, 2015. "Tracking Chinese CPI inflation in real time," Empirical Economics, Springer, vol. 48(4), pages 1619-1641, June.
    3. Edward S. Knotek Ii & Saeed Zaman, 2017. "Nowcasting U.S. Headline and Core Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(5), pages 931-968, August.
    4. Cecilia Frale & Libero Monteforte, "undated". "FaMIDAS: A Mixed Frequency Factor Model with MIDAS structure," Working Papers 3, Department of the Treasury, Ministry of the Economy and of Finance.
    5. repec:eee:intfor:v:34:y:2018:i:2:p:225-234 is not listed on IDEAS
    6. Andrade, Philippe & Fourel, Valère & Ghysels, Eric & Idier, Julien, 2014. "The financial content of inflation risks in the euro area," International Journal of Forecasting, Elsevier, vol. 30(3), pages 648-659.
    7. repec:eee:eneeco:v:67:y:2017:i:c:p:83-90 is not listed on IDEAS
    8. Cláudia Duarte, 2014. "Autoregressive augmentation of MIDAS regressions," Working Papers w201401, Banco de Portugal, Economics and Research Department.
    9. Duarte, Cláudia & Rodrigues, Paulo M.M. & Rua, António, 2017. "A mixed frequency approach to the forecasting of private consumption with ATM/POS data," International Journal of Forecasting, Elsevier, vol. 33(1), pages 61-75.
    10. repec:eee:intfor:v:33:y:2017:i:3:p:679-693 is not listed on IDEAS
    11. J. Isaac Miller, 2014. "Mixed-frequency Cointegrating Regressions with Parsimonious Distributed Lag Structures," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 12(3), pages 584-614.
    12. Sbrana, Giacomo & Silvestrini, Andrea & Venditti, Fabrizio, 2017. "Short-term inflation forecasting: The M.E.T.A. approach," International Journal of Forecasting, Elsevier, vol. 33(4), pages 1065-1081.
    13. Modugno, Michele, 2013. "Now-casting inflation using high frequency data," International Journal of Forecasting, Elsevier, vol. 29(4), pages 664-675.
    14. repec:eee:ecmode:v:72:y:2018:i:c:p:99-108 is not listed on IDEAS
    15. repec:bla:jorssa:v:180:y:2017:i:2:p:353-407 is not listed on IDEAS
    16. repec:eee:ecmode:v:68:y:2018:i:c:p:586-598 is not listed on IDEAS
    17. LUPU, Radu & CALIN, Adrian Cantemir, 2014. "A Mixed Frequency Analysis Of Connections Between Macroeconomic Variables And Stock Markets In Central And Eastern Europe," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 18(2), pages 69-79.

    More about this item

    Keywords

    forecasting inflation; real time forecasts; dynamic factor models; MIDAS regression; economic derivatives;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G19 - Financial Economics - - General Financial Markets - - - Other

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