A Core Inflation Indicator for the Euro Area
This paper proposes a new core inflation indicator for the euro area, obtained by "cleaning" monthly price changes from short-run volatility, idiosyncratic, and measurement errors. We use a factor model to "project" monthly inflation on a large panel of time series. Exploiting multivariate information we obtain a satisfactory degree of smoothing without using backward looking moving averages, which induce a time delay in the signal. The indicator forecasts inflation and is a useful tool for policy makers. It outperforms other commonly used predictors at 6 months and longer horizons. It tracks past policy interventions of the ECB.
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Volume (Year): 37 (2005)
Issue (Month): 3 (June)
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