Do inflation expectations improve model-based inflation forecasts?

Marta Banbura, Danilo Leiva-Leon () and Jan-Oliver Menz

No 48/2021, Discussion Papers from Deutsche Bundesbank

Abstract: Those of professional forecasters do. For a wide range of time series models for the euro area and its member states we find a higher average forecast accuracy of models that incorporate information on inflation expectations from the ECB's SPF and Consensus Economics compared to their counterparts that do not. The gains in forecast accuracy from incorporating inflation expectations are typically not large but significant in some periods. Both short- and long-term expectations provide useful information. By contrast, incorporating expectations derived from financial market prices or those of firms and households does not lead to systematic improvements in forecast performance. Individual models we consider are typically better than univariate benchmarks but for the euro area the professional forecasters are more accurate, especially in recent years (not always for the countries). The analysis is undertaken for headline inflation and inflation excluding energy and food and both point and density forecast are evaluated using real-time data vintages over 2001-2019.

Keywords: Forecasting; Inflation; Inflation expectations; Phillips curve; BayesianVAR (search for similar items in EconPapers)
JEL-codes: C53 E31 E37 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-eec, nep-for, nep-mac, nep-mon and nep-ore
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Do inflation expectations improve model-based inflation Forecasts? (2021)
Working Paper: Do inflation expectations improve model-based inflation forecasts? (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:482021

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