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Composite indicators for monetary analysis

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  • Andrea Nobili

    (Bank of Italy)

Abstract

The prominent role assigned to money by the ECB has been the subject of an intense debate because of the declining predictive power of the monetary aggregate M3 for inflation in recent years. This paper reassesses the information content of monetary analysis for future inflation using dynamic factors extracted from a new and richer cross-section of data including the monetary aggregate M3, its components and counterparts, and a detailed breakdown of deposits and loans at sectoral level. Weighting monetary and credit variables according to their signal to noise ratio allows us to downplay those that in recent times contributed significantly to the deterioration of the information content of the M3. Factor-model based inflation forecasts turn out to be more accurate than those produced by traditional competitor models at the relevant policy horizon of six-quarters ahead. All in all, our results support the view that an analysis based on a large set of monetary and credit variables is a more useful tool for assessing risks to price stability than one that simply focuses on the dynamic of the overall monetary aggregate M3.

Suggested Citation

  • Andrea Nobili, 2009. "Composite indicators for monetary analysis," Temi di discussione (Economic working papers) 713, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_713_09
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2009/2009-0713/en_tema_713.pdf
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    References listed on IDEAS

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    Cited by:

    1. Elena Deryugina & Alexey Ponomarenko, 2017. "Money-based underlying inflation measure for Russia: a structural dynamic factor model approach," Empirical Economics, Springer, vol. 53(2), pages 441-457, September.

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    More about this item

    Keywords

    monetary analysis; factor models; forecasting;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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