Macroeconomic factors for inflation in Argentine 2013-2019

TL;DR

This paper uses factor analysis and econometric models to identify key macroeconomic variables influencing inflation in Argentina from 2013 to 2019, improving forecasting accuracy.

Contribution

It introduces a factor-based approach to identify and incorporate macroeconomic variables into inflation forecasting models for Argentina.

Findings

Money growth, inflation expectations, and exchange rate are key inflation drivers.

Models with more economic information outperform benchmarks.

Causality and impulse response analyses reveal short-term dynamics.

Abstract

The aim of this paper is to investigate the use of the Factor Analysis in order to identify the role of the relevant macroeconomic variables in driving the inflation. The Macroeconomic predictors that usually affect the inflation are summarized using a small number of factors constructed by the principal components. This allows us to identify the crucial role of money growth, inflation expectation and exchange rate in driving the inflation. Then we use this factors to build econometric models to forecast inflation. Specifically, we use univariate and multivariate models such as classical autoregressive, Factor models and FAVAR models. Results of forecasting suggest that models which incorporate more economic information outperform the benchmark. Furthermore, causality test and impulse response are performed in order to examine the short-run dynamics of inflation to shocks in the principal factors.