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A multi-country trend indicator for euro area inflation: computation and properties

In: Empirical studies of structural changes and inflation

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  • Elena Angelini

    (European Central Bank)

  • Jérôme Henry

    (European Central Bank)

  • Ricardo Mestre

    (European Central Bank)

Abstract

This paper applies the 'diffusion indices' approach proposed by Stock and Watson [1998] to the euro area. Following their methodology a set of factors are extracted from a balanced and unbalanced panel dataset comprising nominal variables for 11 countries of the euro area. The estimated factors appear to be fairly stable over time. It is also shown that the first factor is cointegrated with area wide HICP and private consumption deflator supporting the idea that it represents 'a common trend of inflation' for the euro area. The other factors, which are stationary instead, seem to capture dispersion of inflation across countries. There is moreover evidence of unilateral causality from the first factor with respect to HICP, suggesting that this factor could be valuably employed in forecasting euro area inflation JEL Classification: E52, E58

(This abstract was borrowed from another version of this item.)

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This chapter was published in:

  • Bank for International Settlements, 2001. "Empirical studies of structural changes and inflation," BIS Papers, Bank for International Settlements, Bank for International Settlements, number 03, 8.
    This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 03-04.

    Handle: RePEc:bis:bisbpc:03-04

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    1. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
    2. Gabriel Fagan & JÊrÆme Henry, 1998. "Long run money demand in the EU: Evidence for area-wide aggregates," Empirical Economics, Springer, Springer, vol. 23(3), pages 483-506.
    3. Perron, Pierre & Vogelsang, Timothy J, 1992. "Nonstationarity and Level Shifts with an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 10(3), pages 301-20, July.
    4. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
    5. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc.
    6. Mario Forni & Lucrezia Reichlin, 1996. "Dynamic common factors in large cross-sections," ULB Institutional Repository 2013/10149, ULB -- Universite Libre de Bruxelles.
    7. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 49(4), pages 1057-72, June.
    8. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
    9. Wynne, Mark A., 1999. "Core inflation: a review of some conceptual issues," Working Paper Series, European Central Bank 0005, European Central Bank.
    10. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series, European Central Bank 0042, European Central Bank.
    11. Davis, E Philip & Fagan, Gabriel, 1997. "Are Financial Spreads Useful Indicators of Future Inflation and Output Growth in EU Countries?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(6), pages 701-14, Nov.-Dec..
    12. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, Elsevier, vol. 39(1-2), pages 199-211.
    13. Hall, S G, 1991. "The Effect of Varying Length VAR Models on the Maximum Likelihood Estimates of Cointegrating Vectors," Scottish Journal of Political Economy, Scottish Economic Society, vol. 38(4), pages 317-23, November.
    14. Warne, A., 1993. "A Common Trends Model: Identification, Estimation and Inference," Papers, Stockholm - International Economic Studies 555, Stockholm - International Economic Studies.
    15. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, Econometric Society, vol. 59(6), pages 1551-80, November.
    16. Phillips, P. C. B. & Ouliaris, S., 1988. "Testing for cointegration using principal components methods," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 205-230.
    17. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
    18. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
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    Cited by:
    1. Cristadoro, Riccardo & Forni, Mario & Reichlin, Lucrezia & Veronese, Giovanni, 2001. "A Core Inflation Index for the Euro Area," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3097, C.E.P.R. Discussion Papers.
    2. Claudio Morana, 2007. "A structural common factor approach to core inflation estimation and forecasting," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 14(3), pages 163-169.
    3. Jansen, Eilev S., 2004. "Modelling inflation in the euro area," Working Paper Series, European Central Bank 0322, European Central Bank.
    4. Agresti, Anna Maria & Mojon, Benoît, 2001. "Some stylised facts on the euro area business cycle," Working Paper Series, European Central Bank 0095, European Central Bank.
    5. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 205-228.
    6. Daniel Grenouilleau, 2006. "The Stacked Leading Indicators Dynamic Factor Model: A Sensitivity Analysis of Forecast Accuracy using Bootstrapping," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 249, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    7. Daniel Grenouilleau, 2004. "A sorted leading indicators dynamic (SLID) factor model for short-run euro-area GDP forecasting," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 219, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    8. Tomat, Gian Maria, 2002. "Durable goods, price indexes and quality change: an application to automobile prices in Italy, 1988-1998," Working Paper Series, European Central Bank 0118, European Central Bank.
    9. Elena Angelini & Jérôme Henry & Ricardo Mestre, 2001. "Diffusion index-based inflation forecasts for the euro area," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Empirical studies of structural changes and inflation, volume 3, pages 109-138 Bank for International Settlements.
    10. Duarte, Claudia & Rua, Antonio, 2007. "Forecasting inflation through a bottom-up approach: How bottom is bottom?," Economic Modelling, Elsevier, Elsevier, vol. 24(6), pages 941-953, November.
    11. Hahn, Elke, 2002. "Core inflation in the euro area: An application of the generalized dynamic factor model," CFS Working Paper Series 2002/11, Center for Financial Studies (CFS).
    12. K. Hubrich, 2001. "Forecasting euro area inflation: Does contemponaneous aggregration improve the forecasting performance," WO Research Memoranda (discontinued), Netherlands Central Bank, Research Department 661, Netherlands Central Bank, Research Department.
    13. Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, Elsevier, vol. 22(1), pages 39-59, January.

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