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A structural common factor approach to core inflation estimation and forecasting

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  • Morana, Claudio

Abstract

In the paper we propose a new methodological approach to core inflation estimation, based on a frequency domain principal components estimator, suited to estimate systems of fractionally cointegrated processes. The proposed core inflation measure is the scaled common persistent factor in inflation and excess nominal money growth and bears the interpretation of monetary inflation. The proposed measure is characterised by all the properties that an “ideal” core inflation process should show, providing also a superior forecasting performance relative to other available measures. JEL Classification: C22, E31, E52

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0305.

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Date of creation: Feb 2004
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Handle: RePEc:ecb:ecbwps:20040305

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Keywords: common factors; core inflation; euro area; fractional cointegration; long memory; Markov switching;

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References

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  1. Fabio Bagliano & Roberto Golinelli & Claudio Morana, 2002. "Core inflation in the Euro area," Applied Economics Letters, Taylor & Francis Journals, vol. 9(6), pages 353-357.
  2. repec:cup:etheor:v:13:y:1997:i:3:p:315-52 is not listed on IDEAS
  3. Christopher F. Baum & John T. Barkoulas & Mustafa Caglayan, 1999. "Persistence in International Inflation Rates," Southern Economic Journal, Southern Economic Association, vol. 65(4), pages 900-913, April.
  4. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-82, April.
  5. Elena Angelini & Jérôme Henry & Ricardo Mestre, 2001. "Diffusion index-based inflation forecasts for the euro area," BIS Papers chapters, in: Bank for International Settlements (ed.), Empirical studies of structural changes and inflation, volume 3, pages 109-138 Bank for International Settlements.
  6. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, vol. 13(03), pages 315-352, June.
  7. Angelini, Elena & Henry, Jérôme & Mestre, Ricardo, 2001. "A multi-country trend indicator for euro area inflation: computation and properties," Working Paper Series 0060, European Central Bank.
  8. Arrazola, Maria & de Hevia, Jose, 2002. "An alternative measure of core inflation," Economics Letters, Elsevier, vol. 75(1), pages 69-73, March.
  9. Baillie, Richard T & Chung, Ching-Fan & Tieslau, Margie A, 1996. "Analysing Inflation by the Fractionally Integrated ARFIMA-GARCH Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(1), pages 23-40, Jan.-Feb..
  10. Fabio C. Bagliano & Claudio Morana, 1999. "Measuring Core Inflation in Italy," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 58(3-4), pages 301-328, December.
  11. Fabio C. Bagliano & Claudio Morana, 2003. "A common trends model of UK core inflation," Empirical Economics, Springer, vol. 28(1), pages 157-172, January.
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Cited by:
  1. Wojciech Charemza & Imran Hussain Shah, 2012. "Stability Price Index, Core Inflation and Output Volatility," Discussion Papers in Economics 12/21, Department of Economics, University of Leicester.
  2. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
  3. Cavallero, Alessandro, 2011. "The convergence of inflation rates in the EU-12 area: A distribution dynamics approach," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 341-357, June.
  4. Baillie, Richard T. & Morana, Claudio, 2012. "Adaptive ARFIMA models with applications to inflation," Economic Modelling, Elsevier, vol. 29(6), pages 2451-2459.

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