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Core inflation in the euro area: An application of the generalized dynamic factor model

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  • Hahn, Elke

Abstract

Since the second half of the nineties the euro area has been subject to a considerable accumulation of temporary and idiosyncratic price shocks. Core inflation indicators for the euro area are thus of utmost interest. Based on euro area-wide data core inflation in this paper is analyzed by means of an indicator derived from the generalized dynamic factor model. This indicator reveals that HICP inflation strongly exaggerated both the decline as well as the increase in the price trend in 1999 and 2000/2001. Our results reinforce those achieved by Cristadoro, Forni, Reichlin and Versonese (2001) based on euro area country data which indicates the robustness of the indicator.

Suggested Citation

  • Hahn, Elke, 2002. "Core inflation in the euro area: An application of the generalized dynamic factor model," CFS Working Paper Series 2002/11, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:200211
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    References listed on IDEAS

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    1. Elena Angelini & Jérôme Henry & Ricardo Mestre, 2001. "A multi-country trend indicator for euro area inflation: computation and properties," BIS Papers chapters, in: Bank for International Settlements (ed.), Empirical studies of structural changes and inflation, volume 3, pages 81-108, Bank for International Settlements.
    2. Reichlin, Lucrezia & Forni, Mario & Cristadoro, Riccardo & Veronese, Giovanni, 2001. "A Core Inflation Index for the Euro Area," CEPR Discussion Papers 3097, C.E.P.R. Discussion Papers.
    3. Issing,Otmar & Gaspar,Vitor & Angeloni,Ignazio & Tristani,Oreste, 2001. "Monetary Policy in the Euro Area," Cambridge Books, Cambridge University Press, number 9780521788885.
    4. Chamberlain, Gary & Rothschild, Michael, 1983. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," Econometrica, Econometric Society, vol. 51(5), pages 1281-1304, September.
    5. Forni, Mario & Lippi, Marco, 2001. "The Generalized Dynamic Factor Model: Representation Theory," Econometric Theory, Cambridge University Press, vol. 17(6), pages 1113-1141, December.
    6. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2005. "The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 830-840, September.
    7. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
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    Citations

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    Cited by:

    1. Mr. Emil Stavrev, 2006. "Measures of Underlying Inflation in the Euro Area: Assessment and Role for Informing Monetary Policy," IMF Working Papers 2006/197, International Monetary Fund.
    2. Mr. Ashoka Mody & Ms. Franziska L Ohnsorge, 2007. "Can Domestic Policies Influence Inflation?," IMF Working Papers 2007/257, International Monetary Fund.
    3. Emil Stavrev, 2010. "Measures of underlying inflation in the euro area: assessment and role for informing monetary policy," Empirical Economics, Springer, vol. 38(1), pages 217-239, February.

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    More about this item

    Keywords

    Core Inflation; Euro Area; Generalized Dynamic Factor Model; Principal Component Analysis;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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