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Forecasting inflation and tracking monetary policy in the euro area: does national information help?

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Author Info
Riccardo Cristadoro () (Bank of Italy, Economic Research Department)
Fabrizio Venditti () (Bank of Italy, Economic Research Department)
Giuseppe Saporito () (Bank of Italy, Cagliari)

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Abstract

The ECB objective of price stability is given a quantitative content as a year-on-year growth rate in the euro area HICP close but below 2% over the medium term. While this objective is referred to area-wide price developments, in anticipating monetary policy moves, market analysts pay considerable attention to national data. In this paper we use the Generalized Dynamic Factor Model to derive a set of core inflation indicators that, combining national with area-wide data, allow us to answer two related questions: whether country-specific data are actually relevant to the future path of area-wide inflation once the information contained in area-wide data has been exploited, and whether it is useful, in order to track ECB monetary policy decisions, to factor in national and not only area-wide statistics. In both cases, our findings suggest that, when area-wide information is properly taken into account, there is little to be gained by considering national idiosyncratic developments.

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Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 677.

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Date of creation: Jun 2008
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Handle: RePEc:bdi:wptemi:td_677_08

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Related research
Keywords: Forecast; Dynamic factor model; inflation; monetary policy;

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Find related papers by JEL classification:
C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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    Other versions:
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    Other versions:
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  6. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August. [Downloadable!] (restricted)
  7. Riccardo Cristadoro & Mario Forni & Lucrezia Reichlin & Giovanni Veronese, 2001. "A core inflation index for the euro area," Temi di discussione (Economic working papers) 435, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
  8. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2005. "The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 830-840, September. [Downloadable!] (restricted)
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  13. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, vol. 64(5), pages 1067-84, September. [Downloadable!] (restricted)
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  14. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
    Other versions:
  16. Peersman, Gert & Smets, Frank, 1999. "The Taylor Rule: A Useful Monetary Policy Benchmark for the Euro Area?," International Finance, Blackwell Publishing, vol. 2(1), pages 85-116, April. [Downloadable!] (restricted)
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