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

    Delle Monache, D. and Petrella, Ivan and Venditti, F. (2015) Common faith or parting ways? A time varying parameters factor analysis of euro-area inflation. Working Paper. Birkbeck College, University of London, London, UK.

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    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.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: ISSN 1745-8587: BWPEF 1515
    Keyword(s) / Subject(s): Inflation, time-varying parameters, score driven models, state space models, dynamics factor models.
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 20 May 2016 08:54
    Last Modified: 20 May 2016 08:54
    URI: http://eprints.bbk.ac.uk/id/eprint/15264

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