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Weigh(t)ing the basket: aggregate and component-based inflation forecasts for the euro area

Jakub Chalmovianský, Mario Porqueddu and Andrej Sokol ()

No 2501, Working Paper Series from European Central Bank

Abstract: We compare direct forecasts of HICP and HICP excluding energy and food in the euro area and five member countries to aggregated forecasts of their main components from large Bayesian VARs with a shared set of predictors. We focus on conditional point and density forecasts, in line with forecasting practices at many policy institutions. Our main findings are that point forecasts perform similarly using both approaches, whereas directly forecasting aggregate indices tends to yield better density forecasts. In the aftermath of the Great Financial Crisis, relative forecasting performance was typically only affected temporarily. Inflation forecasts made by Eurosystem/ECB staff perform similarly or slightly better than those from our models for the euro area. JEL Classification: C11, C32, C53, E37

Keywords: aggregation; Bayesian VAR model; inflation forecasting (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-eec, nep-for, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202501

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