Forecasting Growth and Inflation in an enlarged Euro Area: Some Policy Implications

We compare models for forecasting growth and infl ation in the enlarged euro

area. Forecasts are built from univariate autoregressive and single-equation

models. The analysis is undertaken for both individual countries and EU aggregate

variables. Aggregate forecasts are constructed by both employing aggregate

variables and by aggregating country-specifi c forecasts. Using fi nancial

variables for country-specifi c forecasts tends to add little to the predictive

ability of a simple AR model. However, they do help to predict EU aggregates.

Furthermore, forecasts from pooling individual country models usually outperform

those of the aggregate itself, particularly for the EU25 grouping. This is

particularly interesting from the perspective of the European Central Bank, who

require forecasts of economic activity and infl ation to formulate appropriate

economic policy across the enlarged group.