Econometrics - Marta Bańbura (European Central Bank)

Econometrics Seminar Series

Title: Do inflation expectations improve model-based inflation  forecasts?
Abstract: They do, even if the gains in forecast accuracy are typically modest. We compare forecast performance of models that incorporate information from observed inflation expectations to their counterparts that do not. We consider a wide range of time series models for headline inflation and inflation excluding energy and food for the euro area and selected countries. We also consider different measures of inflation expectations. We evaluate point and density forecast in real time and also investigate how relative forecast performance  changes over time. We find that the average forecast accuracy of the model version incorporating inflation expectations of professional forecasters is usually higher compared to the  version without expectations. Further, relative performance of both versions changes over time and the gains from incorporating inflation expectations are occasionally significant. By contrast, incorporating expectations derived from financial market prices or those of firms and households does not lead to systematic improvements in forecast performance.