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.
A core inflation indicator for the euro area / R., Cristadoro; Forni, Mario; L., Reichlin; G., Veronese. - In: JOURNAL OF MONEY, CREDIT, AND BANKING. - ISSN 0022-2879. - STAMPA. - 37:3(2005), pp. 539-560. [10.1353/mcb.2005.0028]
A core inflation indicator for the euro area
FORNI, Mario;
2005
Abstract
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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