Figure 3 - uploaded by Riccardo Cristadoro
Content may be subject to copyright.
Source publication
This paper proposes an index of core inflation for the euro area which exploits information from a large panel of time series on disaggregated prices, industrial production, labor market indicators, financial and monetary variables. The index is the result of a smoothing operation at both the cross-sectional and time series level. By extracting the...
Context in source publication
Context 1
... the contrary if the shock is shared by the majority of the European economies and it has an impact on the in ‡ation rate beyond the short term, this is re ‡ected in the core index. The estimate of our core in ‡ation index is shown in Figure 3, where to allow a comparison with the ECB target, the core in ‡ation is expressed as a 12-month di¤erence. end of summer 1993, and it is characterised by a stable core in ‡ation at around 3.5% (while headline in ‡ation was ‡uctuating from 3% to 5%). ...
Similar publications
In recent macroeconomic theory, relative price variability (RPV) generates the central distortions of inflation. This paper provides first evidence on the empirical relation between inflation and RPV in the euro area focusing on threshold effects of inflation. We find that expected inflation significantly increases RPV if inflation is either very l...
This paper explores the Taylor rule – defined as an instrument rule linking the central bank's policy rate to the current inflation rate and the output gap – as a benchmark for analysing monetary policy in the euro area. First, it presents evidence that interest rates in Germany and the euro area can be described by a Taylor rule with interest rate...
In empirical macroeconomics it is frequently observed that, in the short–run, prices tend to rise after a monetary contraction (price puz-zle). This observation cannot be explained by the interest rate channel which would induce a co–movement of prices and output. However, such a price puzzle can be explained if the central bank can directly influe...
Historically, money growth has played an important role in Swiss monetary policy, until 1999 as a target and from 2000 onwards as an indicator variable. Since the new policy framework focusses on an inflation forecast, the question arises how useful money growth is for predicting future price developments. Using Swiss data, this paper estimates a m...
If price levels are initially different across the euro area, convergence to a common level of prices would imply that inflation will be higher in countries where prices are initially low. Price level convergence thus provides a potential explanation for recent cross-country differences in European inflation, a worrisome development under the ECBs...
Citations
... Bovin and Ng (2005) provide a comparison of the static and dynamic factor models for the purpose of forecasting. Factor models are used in literature for forecasting conditional means of market data (Stock and Watson, 2002;Cristadoro, et al., 2001;Artis, et al., 2005;Marcellino, et al., 2003;den Reijer, 2005;Schumacher, 2007, Alonso et al., 2018. Moreover, these models are also used for forecasting conditional volatility. ...
... There is abundance of literature in the area of static factor models (Lawley & Maxwell 1971;Stock & Watson, 1998;Croux, et al. 2004;Deistler & Zinner, 2007). A static factor model may take the following form; ...
Efficient Market Hypothesis has its supporters and critics as it has invited significant attention of research scholarship in recent years. The taxonomy and existence of this hypothesis is widely debated in terms of making economic decisions in the capital markets. Stock returns predictability has galvanized researchers to use forecasting models. Literature shows that forecasting is possible yet it debates problems associated with the techniques used for forecasting from the time series data. The study relies on stock returns for 67 randomly selected companies listed on the Pakistan Stock Exchange. The static and the dynamic factor models are compared in terms of forecast efficiency. The study also uses eight macroeconomic variables to forecast stock returns by including gold prices, crude oil prices, market capitalization, PSX- 100 index, PSX-100 index turnover, KIBOR 1-month rates, KIBOR 3 years rates and Rupee to Dollar rates. The results of the hit rates and out-of-sample forecasting technique suggest that dynamic factor model is the best multivariate time series forecasting model in the Pakistani context.
... It appears to be difficult to improve the accuracy of inflation forecasts by using a large number of variables in comparison with an approach based on a precise selection of variables of interest. In contrast, measurements of underlying inflation have been conducted using this type of approach; we refer interested readers to the articles of Cristadoro et al. (2005) for the eurozone or Kapetanios (2004) for the United Kingdom. ...
... The supranational body is responsible for bank resolution in all countries of its jurisdiction (for example, the European Union) and takes a decision at the aggregate level with no regard for national interests. This approach is akin to the functioning of the European System of Central Banks 8 (ESCB), where the voting members are required to base their vote on the inflation outlook of the euro area and not that of their own country, see Cristadoro et al. (2005). ...
Cross-border banking needs cross-border recapitalisation mechanisms. Each mechanism, however, suffers from the financial trilemma, which is that cross-border banking, national financial autonomy and financial stability are incompatible. In this paper, we study the efficiency of different burden-sharing agreements for the recapitalisation of the 30 largest banks in Europe. We consider bank bailouts for these banks in a simulation framework with stochastic country-specific bailout benefits. Among the burden sharing rules, we find that the majority and qualified-majority voting rules come close to the efficiency of a bailout mechanism with a supranational authority. Even a unanimous voting rule works better than home-country bailouts, which are very inefficient. If we assume additional systemic risk benefits, the efficiency of burden sharing rules comes close to the supranational solution.
... It appears to be difficult to improve the accuracy of inflation forecasts by using a large number of variables in comparison with an approach based on a precise selection of variables of interest. In contrast, measurements of underlying inflation have been conducted using this type of approach; we refer interested readers to the articles of Cristadoro et al. (2005) for the eurozone or Kapetanios (2004) for the United Kingdom. ...
For few years, the increasing size of available economic and financial databases has led econometricians to develop and adapt new methods in order to efficiently summarize information contained in those large datasets. Among those methods, dynamic factor models have known a rapid development and a large success among macroeconomists. In this paper, we carry out a review of the recent literature on dynamic factor models. First we present the models used, then the parameter estimation methods and finally the statistical tests available to choose the number of factors. In the last section, we focus on recent empirical applications, especially dealing with the building of economic outlook indicators, macroeconomic forecasting and macroeconomic and monetary policy analyses.
... It appears to be difficult to improve the accuracy of inflation forecasts by using a large number of variables in comparison with an approach based on a precise selection of variables of interest. In contrast, measurements of underlying inflation have been conducted using this type of approach; we refer interested readers to the articles of Cristadoro et al. (2005) for the eurozone or Kapetanios (2004) for the United Kingdom. ...
La version française de cet article peut être consultée à: http://ssrn.com/abstract=2243625 For few years, the increasing size of available economic and financial databases has led econometricians to develop and adapt new methods in order to efficiently summarize information contained in those large datasets. Among those methods, dynamic factor models have known a rapid development and a large success among macroeconomists. In this paper, we carry out a review of the recent literature on dynamic factor models. First we present the models used, then the parameter estimation methods and finally the statistical tests available to choose the number of factors. In the last section, we focus on recent empirical applications, especially dealing with the building of economic outlook indicators, macroeconomic forecasting and macroeconomic and monetary policy analyses.
... Overall, they conclude that over the period considered (1982198319841985198619871988198919901991199219931994199519961997) the best forecast for the euro area is given by aggregating time series forecasts made for each individual euro area country. Other studies have used large data sets and built factor models to incorporate national economic data into forecasts of economic activity or inflation in the euro area (Angelini et al., 2001; Cristadoro et al., 2001) directly. 8 The benefits of using large data sets is also illustrated in Banbura and Rünstler (2010), who find that surveys and financial data contain important information beyond the monthly real activity measures for the GDP forecasts. ...
We evaluate forecasts for the euro area in data-rich and ‘data-lean’ environments by comparing three different approaches: a simple PMI model based on Purchasing Managers’ Indices (PMIs), a dynamic factor model with euro area data, and a dynamic factor model with data from the euro plus data from national economies (pseudo-real time data). We estimate backcasts, nowcasts and forecasts for GDP, components of GDP, and GDP of all individual euro area members, and examine forecasts for periods of low and high economic volatility (more specifically, we consider 2002-2007, which falls into the ‘Great Moderation’, and the ‘Great Recession’ 2008-2009). We find that all models consistently beat naive AR benchmarks, and overall, the dynamic factor model tends to outperform the PMI model (at times by a wide margin). However, accuracy of the dynamic factor model can be uneven (forecasts for some countries have large errors), with the PMI model dominating clearly for some countries or over some horizons. This is particularly pronounced over the Great Recession, where the dynamic factor model dominates the PMI model for backcasts, but has considerable difficulties beating the PMI model for nowcasts. This suggests that survey-based measures can have considerable advantages in responding to changes during very volatile periods, whereas factor models tend to be more sluggish to adjust.
... In addition to the exclusion of some items core rates can also be determined through the application of several filters, calculation of trimmed means or the persistent component. Also the first factor (principal component) extracted from disaggregated data is used to represent core inflation (Machado et al., 2001;Cristadoro et al., 2001).We further added the special aggregate of frequent out-of-pocket-purchases (FROOPP, ...
We investigate output sensitivity of inflation in the euro area through a disaggregated analysis using price indices at the COICOP 4-digit level and compare cyclical sensitivity of a newly created index of cyclically sensitive items (ICSP) with that of headline HICP and core price indices. We also relate the ICSP to the first common factor extracted from the disaggregated prices, which best reflects the common dynamics of the underlying price indices. Our results indicate that two thirds of the items in the euro area HICP are cyclically sensitive. Categories most robustly related to the business cycle are food items (processed and unprocessed), non-durable industrial goods and services related to recreation. Output sensitivity of the ICSP is significantly higher than that of headline inflation. The difference in output sensitivity is most striking between the ICSP and core inflation because of the rather strong cyclical sensitivity of processed and unprocessed food prices (both in prevalence and the estimated parameter of output sensitivity). The index of cyclically sensitive prices is highly correlated with the first common factor. Given the weak factor structure of disaggregated prices, however, we conclude that the domestic business cycle is an important determinant of inflation but it is only one among a number of nearly equally important factors. --
... The empirical model relies on data reduction techniques that can handle real-time panels updated daily. We follow the estimation procedures of Forni et al. (2000), Cristadoro et al. (2005), and Altissimo et al. (2001). Below, we offer an informal outline of the estimation procedure and refer the reader to the individual papers for specific details. ...
... The estimation procedure by Cristadoro et al. (2005) involves three steps. ...
This paper estimates monthly pass-through ratios from import prices to consumer prices in real time. Conventional time series methods impose restrictions to generate exogenous shocks on exchange rates or import prices when estimating pass-through coefficients. Instead, our estimation strategy follows an event-study approach based on monthly releases in import prices. Projections from a dynamic common factor model with daily panels before and after monthly releases of import prices define the innovation for import prices. We apply our identification procedure to Swiss prices and find strong evidence that the median of the monthly pass-through ratio is around 0.3. Tests show that standard assumptions of non-real time data and limited information breath are critical for the pass-through estimates.
... Another extensive literature examines whether measures of real activity improve in ‡ation forecasts. Stock and Watson (2008) …nd that recently a simple random walk speci…cation (i.e., using the most recently observed annual change in in ‡ation to forecast future in ‡ation) is at least as accurate as most 3 For in ‡ation in the Euro Area see Cristadoro et al. (2001). For in ‡ation in Switzerland the SNB produces DFI (dynamic factor in ‡ation) which is evaluated daily and published monthly, see Amstad and Fischer (2009a and b). ...
Economic forecasts, in particular the forecasts for inflation, are an important part of the monetary policy formulation process at the Reserve Bank. The forecasts from a range of statistical models provide an important cross check for the forecasts produced by the main policy model that supports the policy deliberation process. This article describes the suite of statistical models used at the Reserve Bank and how these models fit into the forecasting process.
... 3 Coincident indexes based on monthly panels have established themselves as popular measures of core inflation. Empirical estimates of monthly core inflation include Stock and Watson (2002) for the United States, Cristadoro et al. (2005) for the euro area, Gosselin and Tkacz (2001) for Canada, and Camacho and Sancho (2003) for Spain. ...
... The forecasting model relies on data reduction techniques that can handle real-time panels updated on a weekly basis. 4 We follow the estimation procedures of Forni et al. (2000), Cristadoro et al. (2005), and Altissimo et al. (2001). Below, we offer an informal outline of the estimation procedure and refer the reader to the individual papers for specific details. ...
... The stationary of the common component allows χ 1,t to be decomposed into the sum of waves of different periodicity. Cristadoro et al. (2005) propose to disentangle χ 1,t into a short-run component, χ S 1,t , and a long-run component, χ L 1,t , by aggregating waves of periodicity smaller or larger than a defined critical period, τ . In term of equations (1) and (2) for monthly inflation, this yields ...
Are weekly inflation forecasts informative? Although several central banks review and discuss monetary policy issues on a bi-weekly basis, there have been no attempts by analysts to construct systematic estimates of core inflation that supports such a decision-making schedule. The timeliness of news releases are recognized to be an important information source in real-time estimation. We incorporate real-time information from macroeconomic releases and revisions into our weekly updates of monthly Swiss core inflation using a common factor procedure. The weekly estimates for Swiss core inflation show that it is worthwhile to update the forecast at least twice a month. Copyright (c) Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2008.
