DP7746 Short-Term Inflation Projections: a Bayesian Vector Autoregressive approach

Author(s):	Domenico Giannone, Michele Lenza, Daphne Momferatou, Luca Onorante
Publication Date:	March 2010
Keyword(s):	Bayesian VAR, Forecast, Inflation
JEL(s):	C11, C13, C33, C53
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=7746

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.