A Factor Model for Euro-area Short-term Inflation Analysis

Michele Lenza and Warmedinger Thomas ()
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Warmedinger Thomas: European Central Bank, DG Economics/Fiscal Policy Division, Kaiserstrasse 29, 60311 Frankfurt a.M., Germany

Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), 2011, vol. 231, issue 1, 50-62

Abstract: This paper develops a factor model for forecasting inflation in the euro area. The model can handle variables with different timeliness, sample size and frequency. We show that the forecasts based on the factor model outperform naïve random walk forecasts, a hard to beat benchmark for euro area inflation forecasts in recent years, at horizons of and beyond nine months ahead. They are also comparable, in terms of accuracy, to the judgemental forecasts prepared in the context of the Eurosystem macroeconomic projection exercises. The factor model is therefore a very suitable tool to extract the signal on current and future euro area inflation from new data releases.

Keywords: Factor model; missing data; short-term; inflation; Factor model; missing data; short-term; inflation (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:jns:jbstat:v:231:y:2011:i:1:p:50-62

DOI: 10.1515/jbnst-2011-0105

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