Evaluating the Determinants of Irish Inflation

Stephen Byrne and Shayan Zakipour-Saber
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Shayan Zakipour-Saber: Central Bank of Ireland

No 01/EL/20, Economic Letters from Central Bank of Ireland

Abstract: During the period from 1970 to the early 2000s, there was a consensus that Irish inflation was primarily determined by external factors. In this letter, we evaluate the relative importance of domestic factors, external factors, and inflation expectations and specify how these have changed over time. We find that since the crisis, external factors remain the most important determinants of inflation. However, domestic factors such as labour slack have been increasingly important in recent years. Evaluating published forecasts against a benchmark statistical model, the Central Bank performs best at shorter horizons, i.e. less than one year. This validates an approach that combines model-evidence with expert judgement.

Date: 2020-02
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