We present a hierarchical architecture based on recurrent neural networks for predicting disaggregated inflation components of the Consumer Price Index (CPI). While majority existing research is focused headline inflation, many economic and financial institutions are interested in its partial components. To this end, we developed novel Hierarchical Recurrent Neural Network (HRNN) model, which u...

We investigate whether a class of trend models, which decompose time series into an underlying and transitory component, with various error term structures can improve upon the forecast performance commonly used models when forecasting consumer price index (CPI) inflation in Australia. The main result is that tend to provide more accurate point density forecasts at medium long horizons compared...

In theory, monetary policies that target the price level, as opposed to the inflation rate, should be highly effective at stabilizing the economy and avoiding deflation in the presence of the zero lower bound on nominal interest rates. With such a policy, if the short-term interest rate is constrained at zero and the inflation rate declines below its trend, the public expects that policy will e...

N recent years, many countries have experienced “stagflation,” a period of high and rising inflation and unemployment. Over this time, higher inflation increasingly has come to be blamed for higher unemployment and reduced growth of real output. This contrasts sharply with previously held notions that there was either a long-run tradeoff between inflation and unemployment or a “natural rate of ...

4 Non-technical summary 5

We propose a simple but effective estimation procedure to extract the level and the volatility dynamics of a latent macroeconomic factor from a panel of observable indicators. Our approach is based on a multivariate conditionally heteroskedastic exact factor model that can take into account the heteroskedasticity feature shown by most macroeconomic variables and relies on an iterated Kalman fil...

n recent years, there has been a significant evolution in the formulation and communication of monetary policy at a number of central banks around the world. Many of these banks now present their economic outlook and policy strategies to the public in a more formal way, a process accompanied by the introduction of modern analytical tools and advanced econometric methods in forecasting and polic...

Over the past two decades, the FOMC has included in its policy decisions a statement of bias toward subsequent tightening or easing of policy. This paper examines the predictive content of these statements in a Taylor-rule setting, finding that they convey information that is useful for forecasting changes in the federal funds rate target, even after controlling for policy responses to inflatio...

Outline This paper analyses the effects of monetary policy decisions on inflation expectations of European consumers. Using a novel approach that does not assume unbiasedness of expectations, which makes use of survey data on expected future as well as perceived past price developments and allows for non-normal peakedness and asymmetry, we convert qualitative survey responses of consumers in va...

The paper introduces the model confidence set (MCS) and applies it to the selection of forecasting models. A MCS is a set of models that is constructed such that it will contain the ’best’ forecasting model, given a level of confidence. Thus, a MCS is analogous to a confidence interval for a parameter. The MCS acknowledges the limitations of the data, such that uninformative data yields a MCS w...