Working Paper Series no. 437: The financial content of inflation risks in the euro area

Abstract

Recent studies emphasize that survey-based inflation risk measures are informative about future inflation and thus useful for monetary authorities. However, these data are typically available at a quarterly frequency whereas monetary policy decisions require a more frequent monitoring of such risks. Using the ECB survey of professional forecasters, we show that high-frequency financial market data have predictive power for the low-frequency survey-based inflation risk indicators observed at the end of a quarter. We rely on MIDAS regressions to handle the problem of mixing data with different frequencies that such an analysis implies. We also illustrate that upside and downside risks react differently to financial indicators.
Forthcoming in : International Journal of Forecasting

Philippe Andrade, Valère Fourel, Eric Ghysels and Julien Idier
July 2013

Classification JEL : E31, E37, C53, C83

Keywords : inflation forecasts, inflation risk, survey data, financial data, MIDAS regression