Common faith or parting ways? A time varying parameters factor analysis of euro-area inflation

Davide Delle Monache, Ivan Petrella and Fabrizio Venditti

No 1515, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: We analyze the interaction among the common and country specific components for the inflation rates in twelve euro area countries through a factor model with time varying parameters. The variation of the model parameters is driven by the score of the predictive likelihood, so that, conditionally on past data, the model is Gaussian and the likelihood function can be evaluated using the Kalman filter. The empirical analysis uncovers significant variation over time in the model parameters. We find that, over an extended time period, inflation persistence has fallen over time and the importance of common shocks has increased relatively to the idiosyncratic disturbances. According to the model, the fall in inflation observed since the sovereign debt crisis, is broadly a common phenomenon, since no significant cross country inflation differentials have emerged. Stressed countries, however, have been hit by unusually large shocks.

Keywords: inflation; time-varying parameters; score driven models; state space models; dynamics factor models. (search for similar items in EconPapers)
JEL-codes: C22 C51 C53 E31 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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https://eprints.bbk.ac.uk/id/eprint/15264 First version, 2015 (application/pdf)

Related works:
Chapter: Common Faith or Parting Ways? A Time Varying Parameters Factor Analysis of Euro-Area Inflation (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:bbk:bbkefp:1515

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