Diffusion Index-Based Inflation Forecasts for the Euro Area

34 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: September 2002

Abstract

Diffusion indexes based on dynamic factors have recently been advocated by Stock and Watson (1998), and further used to perform forecasting tests by the same authors on US data. This technique is explored for the euro area using a multi-country data set and a broad array of variables, in order to test the inflation forecasting performance of extracted factors at the aggregate euro area level. First, a description of f. Conclusions reached are that nominal phenomena in the original variables might be well captured actors extracted from different data sets is performed using a number of different approaches in-sample using the factor approach. Out-of-sample tests have more ambiguous interpretation, as factors seem to be good leading indicators of inflation, but the comparative advantage of the factors is less clear. Nevertheless, alternative indicators such as unemployment or money growth do not outperform them.

Keywords: forecast, euro area, dynamic factors, inflation

JEL Classification: C53, E31, E37

Suggested Citation

Angelini, Elena and Henry, Jerome and Mestre, Ricardo, Diffusion Index-Based Inflation Forecasts for the Euro Area (September 2002). ECB Working Paper No. 61 , Available at SSRN: https://ssrn.com/abstract=356081 or http://dx.doi.org/10.2139/ssrn.356081

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)