Economics at your fingertips  

A multi-country dynamic factor model with stochastic volatility for euro area business cycle analysis

Florian Huber, Michael Pfarrhofer () and Philipp Piribauer

Papers from

Abstract: This paper develops a dynamic factor model that uses euro area (EA) country-specific information on output and inflation to estimate an area-wide measure of the output gap. Our model assumes that output and inflation can be decomposed into country-specific stochastic trends and a common cyclical component. Comovement in the trends is introduced by imposing a factor structure on the shocks to the latent states. We moreover introduce flexible stochastic volatility specifications to control for heteroscedasticity in the measurement errors and innovations to the latent states. Carefully specified shrinkage priors allow for pushing the model towards a homoscedastic specification, if supported by the data. Our measure of the output gap closely tracks other commonly adopted measures, with small differences in magnitudes and timing. To assess whether the model-based output gap helps in forecasting inflation, we perform an out-of-sample forecasting exercise. The findings indicate that our approach yields superior inflation forecasts, both in terms of point and density predictions.

Date: 2020-01
New Economics Papers: this item is included in nep-eec, nep-ets, nep-for and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) Latest version (application/pdf)

Related works:
Journal Article: A multi‐country dynamic factor model with stochastic volatility for euro area business cycle analysis (2020) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Papers from
Bibliographic data for series maintained by arXiv administrators ().

Page updated 2020-12-25
Handle: RePEc:arx:papers:2001.03935