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Underlying inflation and asymmetric risks

Author

Listed:
  • Le Bihan, Hervé
  • Leiva-Leon, Danilo
  • Pacce, Matías

Abstract

We propose a new measure of underlying inflation that informs, in real time, about asymmetric risks on the outlook of inflationary pressures. The asymmetries are generated through nonlinearities induced by economic activity. The new indicator is based on a multivariate regime-switching framework jointly estimated on disaggregated sub-components of the euro area HICP and has several additional advantages. First, it is able to swiftly infer abrupt changes in underlying inflation. Second, it helps to timely track turning points in underlying inflation. Third, the proposed indicator also has a satisfactory performance with respect to various criteria relevant for inflation monitoring. JEL Classification: E17, E31, C11, C22, C24

Suggested Citation

  • Le Bihan, Hervé & Leiva-Leon, Danilo & Pacce, Matías, 2023. "Underlying inflation and asymmetric risks," Working Paper Series 2848, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20232848
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    asymmetric risks; Bayesian methods; regime-switching; underlying inflation;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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