Working Paper Series no. 637: MAPI: Model for Analysis and Projection of Inflation in France

Non-technical summary

This paper documents the new Model for the Analysis and Projection of Inflation in France (MAPI).  MAPI is the model used to forecast inflation in France during the Eurosystem projections exercise since December 2016 (https://www.banque-france.fr/en/economics/macroeconomic-forecasts-france). It is used for both short-term horizon forecasts during the Narrow Inflation Projection Exercise (NIPE) and medium-term horizon forecasts during Broad Macroeconomic Projection Exercise (BMPE), in interaction with the workhorse macroeconomic model Mascotte. 

Compared to previous models, MAPI’s improvements are done along two dimensions:

1. Macroeconomic developments are better taken into account ensuring a complete wage-price setup and consistent projections over all forecasts horizons.
2. We produce disaggregated forecasts for the five main components of inflation (unprocessed food, processed food, manufactured products, energy and services) up to twelve quarters, improving the understanding of inflation dynamics.

We show that the model produces better forecasts than three benchmark models, a Phillips curve, an AR(4) and a random walk at the three different horizons, as illustrated by the figure below for the 12 quarters horizon.

The paper also describes the transmission of shocks into HICP at its subcomponents, focusing on 4 standardized shocks: a shock on the national exchange rate, a shock on the euro dollar exchange rate, a shock on the price of crude oil and a shock in wage. Our simulations show that the transmission of shocks among the components of HICP. While our simulations evidence strong direct effects, notably for oil and euro dollar exchange rate, indirect effects are much more faded and diffuse slowly to components of HICP. Of course, given its partial equilibrium nature, MAPI has to be used as a complement to a full macroeconomic model such as Mascotte to get a complete simulation of the impact of the shocks on the French economy.