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On the importance of sectoral shocks for price-setting

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  • Beck, Guenter W.
  • Hubrich, Kirstin
  • Marcellino, Massimiliano

Abstract

We use a novel disaggregate sectoral euro area dataset with a regional breakdown that allows explicit estimation of the sectoral component of price changes (rather than interpreting the idiosyncratic component as sectoral as done in other papers). Employing a new method to extract factors from over-lapping data blocks, we find for our euro area data set that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. Country- and region-specific factors play an important role in addition to the sector-specific factors. We conclude that sectoral price changes have a 'geographical' dimension, as yet unexplored in the literature, that might lead to new insights regarding the properties of sectoral price changes. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2009/32.

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Date of creation: 2009
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Handle: RePEc:zbw:cfswop:200932

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Keywords: Disaggregated Prices; Euro Area Regional and Sectoral Inflation; Common Factor Models;

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References

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  1. Jean Imbs & Haroon Mumtaz & Morten O. Ravn & Helene Rey, 2003. "PPP Strikes Back: Aggregation and the Real Exchange Rate," IEHAS Discussion Papers 0307, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  2. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
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  4. Bartosz Mackowiak & Mirko Wiederholt, 2004. "Optimal Sticky Prices under Rational Inattention," SFB 649 Discussion Papers SFB649DP2005-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Jul 2005.
  5. Massimiliano Marcellino & Carlo A. Favero & Francesca Neglia, 2005. "Principal components at work: the empirical analysis of monetary policy with large data sets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(5), pages 603-620.
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  9. Beck, Günter W. & Hubrich, Kirstin & Marcellino, Massimiliano, 2006. "Regional inflation dynamics within and across euro area countries and a comparison with the US," CFS Working Paper Series 2007/01, Center for Financial Studies (CFS).
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  16. repec:nbr:nberwo:131477 is not listed on IDEAS
  17. George Kapetanios & Massimiliano Marcellino, 2006. "Factor-GMM Estimation with Large Sets of Possibly Weak Instruments," Working Papers 577, Queen Mary, University of London, School of Economics and Finance.
  18. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
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