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A Core Inflation Indicator for the Euro Area

Riccardo Cristadoro (), Mario Forni (), Lucrezia Reichlin () and Giovanni Veronese

Journal of Money, Credit and Banking, 2005, vol. 37, issue 3, 539-60

Abstract: This paper proposes a new core inflation indicator for the euro area, obtained by "cleaning" monthly price changes from short-run volatility, idiosyncratic, and measurement errors. We use a factor model to "project" monthly inflation on a large panel of time series. Exploiting multivariate information we obtain a satisfactory degree of smoothing without using backward looking moving averages, which induce a time delay in the signal. The indicator forecasts inflation and is a useful tool for policy makers. It outperforms other commonly used predictors at 6 months and longer horizons. It tracks past policy interventions of the ECB.

Date: 2005
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