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Nowcasting inflation using high frequency data

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  • Modugno, Michele

Abstract

This paper proposes a methodology to nowcast and forecast inflation using data with sampling frequency higher than monthly. The nowcasting literature has been focused on GDP, typically using monthly indicators in order to produce an accurate estimate for the current and next quarter. This paper exploits data with weekly and daily frequency in order to produce more accurate estimates of inflation for the current and followings months. In particular, this paper uses the Weekly Oil Bulletin Price Statistics for the euro area, the Weekly Retail Gasoline and Diesel Prices for the US and daily World Market Prices of Raw Materials. The data are modeled as a trading day frequency factor model with missing observations in a state space representation. For the estimation we adopt the methodology exposed in Banbura and Modugno (2010). In contrast to other existing approaches, the methodology used in this paper has the advantage of modeling all data within a unified single framework that, nevertheless, allows one to produce forecasts of all variables involved. This offers the advantage of disentangling a model-based measure of ”news” from each data release and subsequently to assess its impact on the forecast revision. The paper provides an illustrative example of this procedure. Overall, the results show that these data improve forecast accuracy over models that exploit data available only at monthly frequency for both countries. JEL Classification: E31, E37, C53

Suggested Citation

  • Modugno, Michele, 2011. "Nowcasting inflation using high frequency data," Working Paper Series 1324, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20111324
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    References listed on IDEAS

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    1. Giannone, Domenico & Reichlin, Lucrezia & Small, David, 2008. "Nowcasting: The real-time informational content of macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 665-676, May.
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    5. Lenza Michele & Warmedinger Thomas, 2011. "A Factor Model for Euro-area Short-term Inflation Analysis," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 231(1), pages 50-62, February.
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    7. Banerjee, Anindya & Marcellino, Massimiliano, 2006. "Are there any reliable leading indicators for US inflation and GDP growth?," International Journal of Forecasting, Elsevier, vol. 22(1), pages 137-151.
    8. Domenico Giannone & Lucrezia Reichlin & David H. Small, 2005. "Nowcasting GDP and inflation: the real-time informational content of macroeconomic data releases," Finance and Economics Discussion Series 2005-42, Board of Governors of the Federal Reserve System (U.S.).
    9. Elena Angelini & Marta Banbura & Gerhard Rünstler, 2010. "Estimating and forecasting the euro area monthly national accounts from a dynamic factor model," OECD Journal: Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2010(1), pages 1-22.
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    More about this item

    Keywords

    factor models; forecasting; inflation; mixed frequencies;
    All these keywords.

    JEL classification:

    • 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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