Posted

August 01, 2010 12:00:00 AM

Date

2010-07

Author

Libero Monteforte and Gianluca Moretti

Affiliation

Bank of Italy

Title

Real time forecasts of inflation: the role of financial variables

Summary /
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.

URL:http://d.repec.org/n?u=RePEc:bdi:wptemi:td_767_10&r=mac

Keywords

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

URL

http://www.bancaditalia.it/pubblicazioni/econo/temidi/td10/td767_10/en_td_767_10/en_tema_767.pdf

Remarks

This methodology belongs to the class of mixed-frequency models, and is called MIxed DAta Sampling regression model (MIDAS). It may be potentially useful for your inflation forecasts. It incorporates daily prices of relevant commodities and …financial assets into a monthly forecasting model of inflation.

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