A Multi-Country Trend Indicator for Euro Area Inflation: Computation and Properties

ECB Working Paper No. 60

46 Pages Posted: 19 Feb 2003

See all articles by Elena Angelini

Elena Angelini

European Central Bank (ECB)

Jerome Henry

European Central Bank (ECB)

Ricardo Mestre

European Central Bank (ECB)

Date Written: April 2001

Abstract

This paper applies the "diffusion indices" approach proposed by Stock and Watson [1998] to the euro area. Following their methodology a set of factors are extracted from a balanced and unbalanced panel dataset comprising nominal variables for 11 countries of the euro area. The estimated factors appear to be fairly stable over time. It is also shown that the first factor is cointegrated with area wide HICP and private consumption deflator supporting the idea that it represents "a common trend of inflation" for the euro area. The other factors, which are stationary instead, seem to capture dispersion of inflation across countries. There is moreover evidence of unilateral causality from the first factor with respect to HICP, suggesting that this factor could be valuably employed in forecasting euro area inflation.

Keywords: Inflation, euro area, dynamic factors, forecast

JEL Classification: E52, E58

Suggested Citation

Angelini, Elena and Henry, Jerome and Mestre, Ricardo, A Multi-Country Trend Indicator for Euro Area Inflation: Computation and Properties (April 2001). ECB Working Paper No. 60, Available at SSRN: https://ssrn.com/abstract=356080

Elena Angelini (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
49 69 1344 7912 (Phone)
44 69 1344 6575 (Fax)

Jerome Henry

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7614 (Phone)
+49 69 1344 6575 (Fax)

Ricardo Mestre

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

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