A Structural Common Factor Approach to Core Inflation Estimation and Forecasting

Abstract

In the paper we propose a new methodological approach to core inflation estimation, based on a frequency domain principal components estimator, suited to estimate systems of fractionally cointegrated processes. The proposed core inflation measure is the common persistent feature in inflation and excess nominal money growth and bears the interpretation of monetary inflation. The proposed measure is characterised by all the properties that an ideal core inflation process should show, providing also a superior forecasting performance relative to other available measures.

Keywords: Fractional cointegration, cobreaking, core inflation, euro area

JEL Classification: C22, E31, E52