Structural changes to quarterly projection model

Ana Živkovic, Jelena Momcilovic, Zorica Roljic Mihanovic, Danilo Cerovic, Ana Živkovic, Jelena Momcilovic, Zorica Roljic Mihanovic and Danilo Cerovic
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Ana Živkovic: National Bank of Serbia
Jelena Momcilovic: National Bank of Serbia
Zorica Roljic Mihanovic: National Bank of Serbia
Danilo Cerovic: National Bank of Serbia

Working Papers Bulletin from National Bank of Serbia

Abstract: In this paper we present structural changes to the macroeconomic model used in the National Bank of Serbia for medium-term inflation forecasting, made in the period since inflation targeting was first introduced as the monetary policy regime. We describe in detail three changes related to inflation determinants. The first change has to do with the aggregation of overall inflation components, with the goal of linking them more directly to the underlying factors driving inflation. The second change is an extension of the model to explicitly include the effect of private sector wages on inflation. The third change is the inclusion of the effect of fiscal policy on aggregate demand, which has increased in significance in the period since the breakout of the COVID-19 pandemic in 2020. From the perspective of a reduced forecast error, the changes are justified by performing historical simulations.

Keywords: inflation; model; prices; labour market; wages; fiscal impulse (search for similar items in EconPapers)
JEL-codes: C53 E17 E58 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2022-09
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