Forecasting monetary union inflation: a disaggregated approach by countries and by sectors

Abstract

Inflation in the European Monetary Union is measured by the Ra.IlJllonised Consumer Price Index (RCP!) and it can be analysed by breaking down the aggregate index in two different ways. One refers to the breakdown into price indexes corresponding to big groups of markets throughout the European countries and another considers the RCP! by countries. The paper shows that both disaggregations are of interest because in each one, the component prices are not fully cointegrated and then have more than one common factor. For purposes of forecasting the RCP! for the global EMU the disaggregation matters in all the horizons, one to twelve months, considered in the paper. The question is that innovations in an aggregate of non-fully cointegrated componentes will have different long-run effects depending on the common trend which they mainly stem from. Then the resulting ARIMA model for the aggregate can have a quite complex structure which restrictions which could be captured more easily through a disaggregate approach