A Core Inflation Index for the Euro Area

40 Pages Posted: 8 Jan 2002

See all articles by Riccardo Cristadoro

Riccardo Cristadoro

Bank of Italy

Mario Forni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Centre for Economic Policy Research (CEPR)

Lucrezia Reichlin

London Business School; Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR); European Central Bank (ECB)

Giovanni Veronese

Bank of Italy

Date Written: December 2001

Abstract

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, labour 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 common component of national inflation and disregarding the idiosyncratic one, we clean inflation from measurement error, discrepancies in data recording and dynamics originated by national or sectoral idiosyncratic shocks (cross-sectional smoothing). By extracting the component with periodicity longer than one year we clean from high frequency variation and seasonal components which are not relevant for monetary policy (time series smoothing). The indicator is shown to have a number of desirable characteristics and to perform very well as a forecaster of the euro area harmonized consumer price index at one and two years horizon, which is the relevant horizon for the ECB monetary policy.

Keywords: Core inflation, dynamic factor model, inflation forecast, monetary policy

Suggested Citation

Cristadoro, Riccardo and Forni, Mario and Reichlin, Lucrezia and Veronese, Giovanni Furio, A Core Inflation Index for the Euro Area (December 2001). CEPR Discussion Paper No. 3097. Available at SSRN: https://ssrn.com/abstract=296224

Riccardo Cristadoro (Contact Author)

Bank of Italy ( email )

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Mario Forni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Lucrezia Reichlin

London Business School ( email )

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Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

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Centre for Economic Policy Research (CEPR)

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European Central Bank (ECB) ( email )

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Giovanni Furio Veronese

Bank of Italy ( email )

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Italy
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+49 621 189 1884 (Fax)

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