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

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  • Riccardo Cristadoro

    ()
    (Bank of Italy, Economic Research Department)

  • Fabrizio Venditti

    ()
    (Bank of Italy, Economic Research Department)

  • Giuseppe Saporito

    ()
    (Bank of Italy, Cagliari)

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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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area 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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Keywords: Forecast; Dynamic factor model; inflation; monetary policy;

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  1. Vega, Juan Luis & Wynne, Mark A., 2001. "An evaluation of some measures of core inflation for the euro area," Working Paper Series 0053, European Central Bank.
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Cited by:
  1. Guido Bulligan & Massimiliano Marcellino & Fabrizio Venditti, 2012. "Forecasting economic activity with higher frequency targeted predictors," Temi di discussione (Economic working papers) 847, Bank of Italy, Economic Research and International Relations Area.
  2. Guido Bulligan & Roberto Golinelli & Giuseppe Parigi, 2010. "Forecasting monthly industrial production in real-time: from single equations to factor-based models," Empirical Economics, Springer, vol. 39(2), pages 303-336, October.
  3. Guido Bulligan & Roberto Golinelli & Giuseppe Parigi, 2010. "Forecasting industrial production: the role of information and methods," IFC Bulletins chapters, in: Bank for International Settlements (ed.), The IFC's contribution to the 57th ISI Session, Durban, August 2009, volume 33, pages 227-235 Bank for International Settlements.

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