Inflation Analysis: An Overview

The purpose of this article is to describe how inflation analysis and forecasting has been carried out in the Bank, with particular emphasis on recent research and the new challenges facing the Bank following the launch of the euro on 1 January 1999. Broadly speaking the approach adopted by the Bank over a number of years has been an eclectic one which combines judgement and a range of formal approaches. The latter include structural models which are strongly influenced by basic macroeconomic theories of the small open economy (SOE), indicator analysis, including a composite leading indicator, and time series methods such as autoregressive integrated moving average (ARIMA), vector autoregressive (VAR) and Bayesian VAR (BVAR) models. The emphasis on particular methodologies has evolved over time but in all cases judgement has played a central role.