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

    Monache, D.D. and Petrella, Ivan and Venditti, F. (2016) Common faith or parting ways? A time varying parameters factor analysis of Euro-area inflation. In: Hillebrand, E. and Koopman, S.J. (eds.) Dynamic Factor Models. Advances in Econometrics 35 35. Emerald, pp. 539-565. ISBN 9781785603532.

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    Abstract

    We analyze the interaction among the common and country-specific components for the inflation rates in 12 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 and the importance of common shocks has increased relatively to that of 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: Book Section
    Additional Information: Series ISSN: 0731-9053
    Keyword(s) / Subject(s): inflation, time-varying parameters, score driven models, state space models, dynamic factor models
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 21 Jun 2016 11:40
    Last Modified: 21 Jun 2016 11:40
    URI: http://eprints.bbk.ac.uk/id/eprint/15598

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