Working Paper: CEPR ID: DP7746
Authors: Domenico Giannone; Michele Lenza; Daphne Momferatou; Luca Onorante
Abstract: In this paper, we construct a large Bayesian Vector Autoregressive model (BVAR) for the Euro Area that captures the complex dynamic inter-relationships between the main components of the Harmonized Index of Consumer Price (HICP) and their determinants. The model is estimated using Bayesian shrinkage. We evaluate the model in real time and find that it produces accurate forecasts. We use the model to study the pass-through of an oil shock and to study the evolution of inflation during the global financial crisis.
Keywords: Bayesian VAR; Forecast; Inflation
JEL Codes: C11; C13; C33; C53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| BVAR model (C32) | inflation forecasting (F37) |
| oil price shock (Q43) | energy prices (Q41) |
| energy prices (Q41) | non-energy components of HICP (C43) |
| oil price shock (Q43) | overall HICP (C43) |
| economic activity (E20) | inflation dynamics (E31) |