Short-Term Inflation Projections Model and Its Assessment in Latvia

SUMMARY

This paper develops a Short-Term Inflation Projections (STIP) model, which captures cointegrated relationships between highly disaggregated consumer prices and their determinants. We document a significant pass-through of domestic labour costs, crude oil and global food commodity prices to consumer prices in Latvia. We also assess the model's forecast accuracy of Latvia's inflation during 2014–2018 and find that the STIP model statistically significantly outperforms a naïve benchmark model in real time.

Keywords: inflation forecasting, autoregressive distributed lag model, pass-through, oil prices, food commodity prices, labour costs

JEL codes: C32, C51, C52, C53, E31

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