The paper aims at forecasting euro area inflation using a medium-scale model that includes variables for the four biggest euro area countries (Germany, Spain, France, and Italy). The model takes into account both inflation key drivers of and cross-country dynamic interactions. The forecasting accuracy is evaluated over the sample 2006-17.
The model provides good forecasting accuracy with respect to the popular benchmarks used in the literature. Moreover, the multi-country model overall outperforms a model that includes aggregate variables in its ability to forecast inflation excluding energy and unprocessed food. For headline inflation, which is mainly driven by global factors, a model including aggregate euro area variables provides very competitive results.
Published in 2021 in: Empirical Economics, v. 61, 4, pp. 2477-2499
