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Forecasting inflation and tracking monetary policy in the euro area: does national information help?

  • Riccardo Cristadoro

    ()

    (Bank of Italy, Economic Research Department)

  • Fabrizio Venditti

    ()

    (Bank of Italy, Economic Research Department)

  • Giuseppe Saporito

    ()

    (Bank of Italy, Cagliari)

The ECB objective of price stability is given a quantitative content as a year-on-year growth rate in the euro area HICP close but below 2% over the medium term. While this objective is referred to area-wide price developments, in anticipating monetary policy moves, market analysts pay considerable attention to national data. In this paper we use the Generalized Dynamic Factor Model to derive a set of core inflation indicators that, combining national with area-wide data, allow us to answer two related questions: whether country-specific data are actually relevant to the future path of area-wide inflation once the information contained in area-wide data has been exploited, and whether it is useful, in order to track ECB monetary policy decisions, to factor in national and not only area-wide statistics. In both cases, our findings suggest that, when area-wide information is properly taken into account, there is little to be gained by considering national idiosyncratic developments.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 677.

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Date of creation: Jun 2008
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Handle: RePEc:bdi:wptemi:td_677_08
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