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ALICE: A new inflation monitoring tool

Author

Listed:
  • Hahn, Elke
  • Zekaite, Zivile
  • de Bondt, Gabe

Abstract

This paper develops Area-wide Leading Inflation CyclE (ALICE) indicators for euro area headline and core inflation with an aim to provide early signals about turning points in the respective inflation cycle. The series included in the two composite leading indicators are carefully selected from around 160 candidate leading series using a general-to-specific selection process. The headline ALICE includes nine leading series and has a lead time of 3 months while the core ALICE consists of seven series and leads the reference cycle by 4 months. The lead times of the indicators increase to 5 and 9 months, respectively, based on a subset of the selected leading series with longer leading properties. Both indicators identify main turning points in the inflation cycle ex post and perform well in a simulated real-time exercise over the period from 2010 to the beginning of 2018. They also have performed well in forecasting the direction of inflation. In terms of the quantitative forecast accurracy, the headline ALICE has on average performed broadly similarly to the Euro Zone Barometer survey, slightly worse than the Eurosystem/ECB Staff macroeconomic projections and better than the Random Walk model, albeit this is not the case for the core ALICE. JEL Classification: C32, C52, C53, E31, E37

Suggested Citation

  • Hahn, Elke & Zekaite, Zivile & de Bondt, Gabe, 2018. "ALICE: A new inflation monitoring tool," Working Paper Series 2175, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20182175
    Note: 854549
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    More about this item

    Keywords

    band pass filter; euro area inflation; forecasting; leading indicators; trend-cycle decomposition;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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