Abstract
The Bulletin of EU & US Inflation and Macroeconomic Analysis (BIAM) is a monthly publication that has been reporting real time analysis and forecasts for inflation and other macroeconomic aggregates for the Euro Area, the US and Spain since 1994. The BIAM inflation forecasting methodology stands on working with useful disaggregation schemes, using leading indicators when possible and applying outlier correction. The paper relates this methodology to corresponding topics in the literature and discusses the design of disaggregation schemes. It concludes that those schemes would be useful if they were formulated according to economic, institutional and statistical criteria aiming to end up with a set of components with very different statistical properties for which valid single-equation models could be built. The BIAM assessment, which derives from a new observation, is based on (a) an evaluation of the forecasting errors (innovations) at the components’ level. It provides information on which sectors they come from and allows, when required, for the appropriate correction in the specific models. (b) In updating the path forecast with its corresponding fan chart. Finally, we show that BIAM real time Euro Area inflation forecasts compare successfully with the consensus from the ECB Survey of Professional Forecasters, one and two years ahead.
Highlights
The Bulletin of EU & US Inflation and Macroeconomic Analysis (BIAM, the acronym from the Spanish name of the publication) is a monthly report that includes real time forecasts and analysis of the main macro variables of the Euro Area (EA) and Spain and some US variables such as inflation and industrial production.The methodology developed in the BIAM has its origin in an innovative paper by Espasa et al.(1984) that established that inflation analysis for forecasting and diagnostic purposes should look deeper than in aggregate global inflation
This paper focuses on inflation, but the main lines of the methodology are common to the rest of the macroeconomic variables analysed in the BIAM
The components’ data have different distributional properties, and based on the aforementioned hints from Lütkepohl (1987), it seems appropriate to exploit the specific non-stationary properties of the components on trend and seasonality, the restrictions existing between them, the inclusion of specific leading indicators, outlier correction and variables for special events, and the formulation of non-linear models for the components which could require them in the econometric modelling of the components
Summary
The Bulletin of EU & US Inflation and Macroeconomic Analysis (BIAM, the acronym from the Spanish name of the publication) is a monthly report that includes real time forecasts and analysis of the main macro variables of the Euro Area (EA) and Spain and some US variables such as inflation and industrial production. The basic points of the BIAM methodology could be summarised as follows: (1) Work with useful disaggregation schemes; (2) Use leading indicators when possible; (3) Take into account the main events affecting inflation such as changes in VAT or other indirect taxes, changes in methodology by statistical offices, pricing policy changes of big firms in the communication sector and others, subsidies which affect prices, such as those for buying new cars, etc In some instances, these specific events could require building models with changing parameters; (4) Apply outlier correction; (5) Use non-linear formulations when necessary; (6) Use the most recent information in nowcasting, especially in non-processed food and energy prices; (7) Monitor forecasting errors for possible mean corrections or application of robust forecasting procedures; and (8) Provide fan charts or confidence intervals to assess uncertainty.
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