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Short-Term Inflation Projections: a Bayesian Vector Autoregressive approach

Listed author(s):
  • Giannone, Domenico
  • Lenza, Michele
  • Momferatou, Daphne
  • Onorante, Luca

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7746.

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Date of creation: Mar 2010
Handle: RePEc:cpr:ceprdp:7746
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  1. Christopher A. Sims, 1992. "A Nine Variable Probabilistic Macroeconomic Forecasting Model," Cowles Foundation Discussion Papers 1034, Cowles Foundation for Research in Economics, Yale University.
  2. Domenico Giannone & Michèle Lenza & Giorgio E. Primiceri, 2012. "Prior Selection for Vector Autoregressions," Working Papers ECARES ECARES 2012-002, ULB -- Universite Libre de Bruxelles.
  3. Martha Banbura & Domenico Giannone & Lucrezia Reichlin, 2008. "Large Bayesian VARs," Working Papers ECARES 2008_033, ULB -- Universite Libre de Bruxelles.
  4. Giannone, Domenico & Henry, Jérôme & Lalik, Magdalena & Modugno, Michele, 2010. "An area-wide real-time database for the euro area," Working Paper Series 1145, European Central Bank.
  5. Fernandez, Roque B, 1981. "A Methodological Note on the Estimation of Time Series," The Review of Economics and Statistics, MIT Press, vol. 63(3), pages 471-476, August.
  6. Kadiyala, K. Rao & Karlsson, Sune, 1994. "Numerical Aspects of Bayesian VAR-modeling," SSE/EFI Working Paper Series in Economics and Finance 12, Stockholm School of Economics.
  7. Robert B. Litterman, 1983. "A random walk, Markov model for the distribution of time series," Staff Report 84, Federal Reserve Bank of Minneapolis.
  8. James H. Stock & Mark W. Watson, 2010. "Modeling Inflation After the Crisis," NBER Working Papers 16488, National Bureau of Economic Research, Inc.
  9. Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers 274, Federal Reserve Bank of Minneapolis.
  10. Gabriel Fagan & Julian Morgan (ed.), 2005. "Econometric Models of the Euro-area Central Banks," Books, Edward Elgar Publishing, number 3918.
  11. Daniel F. Waggoner & Tao Zha, 1999. "Conditional Forecasts In Dynamic Multivariate Models," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 639-651, November.
  12. Benalal, Nicholai & Diaz del Hoyo, Juan Luis & Landau, Bettina & Roma, Moreno & Skudelny, Frauke, 2004. "To aggregate or not to aggregate? Euro area inflation forecasting," Working Paper Series 0374, European Central Bank.
  13. Danilov, Dmitry & Magnus, J.R.Jan R., 2004. "On the harm that ignoring pretesting can cause," Journal of Econometrics, Elsevier, vol. 122(1), pages 27-46, September.
  14. Frank Smets, 2010. "Commetary: modeling inflation after the crisis," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 221-234.
  15. D'Agostino, Antonello & Giannone, Domenico & Surico, Paolo, 2007. "(Un)Predictability and Macroeconomic Stability," CEPR Discussion Papers 6594, C.E.P.R. Discussion Papers.
  16. De Mol, Christine & Giannone, Domenico & Reichlin, Lucrezia, 2008. "Forecasting using a large number of predictors: Is Bayesian shrinkage a valid alternative to principal components?," Journal of Econometrics, Elsevier, vol. 146(2), pages 318-328, October.
  17. 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.
  18. John C. Robertson & Ellis W. Tallman, 1999. "Vector autoregressions: forecasting and reality," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 4-18.
  19. James H. Stock & Mark W. Watson, 2008. "Phillips Curve Inflation Forecasts," NBER Working Papers 14322, National Bureau of Economic Research, Inc.
  20. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986. "Forecasting and conditional projection using realistic prior distribution," Staff Report 93, Federal Reserve Bank of Minneapolis.
  21. Gabriel Fagan & Julian Morgan, 2005. "An overview of the structural econometric models of euro-area central banks," Chapters, in: Econometric Models of the Euro-area Central Banks, chapter 1 Edward Elgar Publishing.
  22. Todd E. Clark & Stephen J. Terry, 2010. "Time Variation in the Inflation Passthrough of Energy Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1419-1433, October.
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