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

Authors

CHALMOVIANSKÝ Jakub SOKOL Andrej PORQUEDDU Mario

Year of publication 2020
MU Faculty or unit

Faculty of Economics and Administration

Citation
Description 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.

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