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Do food commodity prices have asymmetric effects on Euro-Area inflation?

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  • Mario Porqueddu

    () (Bank of Italy)

  • Fabrizio Venditti

    () (Bank of Italy)

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    Abstract

    This paper analyzes the relationship between commodity prices and consumer food prices in the euro area and in its largest economies (Germany, France and Italy) and tests whether the latter respond asymmetrically to shocks to the former. The issue is of particular interest for those monetary authorities that target headline consumer price inflation, which has been heavily influenced by pronounced swings in international commodity prices in the past decade. The empirical analysis is based on two distinct but complementary approaches. First, we employ a structural model to identify a shock to commodity prices and verify using formal econometric tests whether the Impulse Response Functions of food consumer prices is invariant to the sign of the commodity price shock. Next, we employ predictive regressions and examine the relative forecasting ability of linear models compared with that of models that allow for sign-dependent nonlinearities. Overall, the empirical analysis uncovers very little evidence of asymmetries.

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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 878.

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    Date of creation: Sep 2012
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    Handle: RePEc:bdi:wptemi:td_878_12

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    Keywords: Food prices; Asymmetry; Inflation;

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