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A core inflation index for the euro area

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Author Info
Riccardo Cristadoro () (Banca d'Italia)
Mario Forni (Università di Modena and CEP)
Lucrezia Reichlin () (Université Libre de Bruxelles, ECARES and CEPR)
Giovanni Veronese () (Bank of Italy, Economic Research Department)

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Abstract

This paper proposes an index of core inflation for the euro area which exploits information from a large panel of time series on disaggregated prices, industrial production, labor market indicators, financial and monetary variables. The index is the result of a smoothing operation at both the cross-sectional and time series level. By extracting the common component of national inflation and disregarding the idiosyncratic one, we clean inflation from measurement error, discrepancies in data recording and dynamics originated by national or sectoral idiosyncratic shocks (cross-sectional smoothing). By extracting the component with periodicity longer than one year we clean from high frequency variation and seasonal components which are not relevant for monetary policy (time series smoothing). The indicator is shown to have a number of desirable characteristics and to perform very well as a forecaster of the euro area harmonized consumer price index at one and two years horizon, which is the relevant horizon for the ECB monetary policy.

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Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 435.

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Date of creation: Dec 2001
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Handle: RePEc:bdi:wptemi:td_435_01

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Related research
Keywords: core inflation; dynamic factor model; inflation forecast and monetary policy;

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Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    Other versions:
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  17. Filippo Altissimo & Antonio Bassanetti & Riccardo Cristadoro & Mario Forni & Marco Lippi & Lucrezia Reichlin & Giovanni Veronese, 2001. "A real time coincident indicator of the euro area business cycle," Temi di discussione (Economic working papers) 436, Bank of Italy, Economic Research Department. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andreas Fischer & Marlene Amstad, 2004. "Sequential Information Flow and Real-Time Diagnosis of Swiss Inflation: Intra-Monthly DCF Estimates for a Low-Inflation Environment," Working Papers 04.06, Swiss National Bank, Study Center Gerzensee. [Downloadable!]
    Other versions:
  2. Jörg Breitung & Sandra Eickmeier, 2006. "Dynamic factor models," AStA Advances in Statistical Analysis, Springer, vol. 90(1), pages 27-42, March. [Downloadable!] (restricted)
    Other versions:
  3. Maria Arrazola & Jose de Hevia, 2008. "A simple inflation indicator for the euro zone," Applied Economics, Taylor and Francis Journals, vol. 40(18), pages 2387-2394. [Downloadable!] (restricted)
  4. Riccardo Cristadoro & Fabrizio Venditti & Giuseppe Saporito, 2008. "Forecasting inflation and tracking monetary policy in the euro area - does national information help?," Working Paper Series 900, European Central Bank. [Downloadable!]
    Other versions:
  5. Reichlin, Lucrezia, 2002. "Factor Models in Large Cross-Sections of Time Series," CEPR Discussion Papers 3285, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Ricardo Reis & Mark W. Watson, 2007. "Relative Goods' Prices, Pure Inflation, and the Phillips Correlation," NBER Working Papers 13615, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Paolo Angelini, 2002. "Liquidity and Announcement Effects in the Euro Area," Temi di discussione (Economic working papers) 451, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
  8. Amstad, Marlene & Fischer, Andreas M, 2005. "Shock Identification of Macroeconomic Forecasts Based on Daily Panels," CEPR Discussion Papers 5008, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Fritz Breuss, 2002. "Was ECB's monetary policy optimal?," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(3), pages 298-319, September. [Downloadable!] (restricted)
  10. Rapacciuolo, Ciro, 2003. "Un semplice modello univariato per la previsione a breve termine dell'inflazione italiana
    [A simple model for the short term forecasting of Italian inflation]    ," MPRA Paper 7714, University Library of Munich, Germany. [Downloadable!]
  11. Ricardo Reis & Mark W. Watson, 2007. "Measuring changes in the value of the numeraire," Kiel Working Papers 1364, Kiel Institute for the World Economy. [Downloadable!]
  12. Emil Stavrev, 2006. "Measures of Underlying Inflation in the Euro Area: Assessment and Role for Informing Monetary Policy," IMF Working Papers 06/197, International Monetary Fund. [Downloadable!]
  13. Silvia Magri, 2002. "Italian households' debt: determinants of demand and supply," Temi di discussione (Economic working papers) 454, Bank of Italy, Economic Research Department. [Downloadable!]
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