Factor model

January 1, 2005

We study the degree of output and consumption asymmetry for the ten new and fifteen original European Union members during the period 1994–2001. We establish basic stylized facts about macroeconomic asymmetry from correlations of GDP and consumption growth rates with corresponding aggregates. In addition, we determine which countries would potentially gain the most from international risk sharing within the European Union employing a utility-based measure suggested by Kalemli-Ozcan, Sørensen and Yosha (2001). We find much higher potential gains for the new members compared to those for original EU-15 countries. In particular, economies with the most volatile and counter-cyclical output growth – Czech Republic, Slovak Republic, and the three Baltic states – might benefit the most. We show that EU enlargement would not reduce the welfare of EU-15 members. If these countries move towards full risk sharing their potential welfare gains after enlargement would be virtually unchanged.

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August 1, 2005

This paper formalizes the process of updating the nowcast and forecast on output and inflation as new releases of data become available. The marginal contribution of a particular release for the value of the signal and its precision is evaluated by computing 'news' on the basis of an evolving conditioning information set. The marginal contribution is then split into what is due to timeliness of information and what is due to economic content. We find that the Federal Reserve Bank of Philadelphia surveys have a large marginal impact on the nowcast of both inflation variables and real variables and this effect is larger than that of the Employment Report. When we control for timeliness of the releases, the effect of hard data becomes sizeable. Prices and quantities affect the precision of the estimates of GDP while inflation is only affected by nominal variables and asset prices.

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March 1, 2008

Several industrialised countries have had a similar inflation experience in the past 30 years, with inflation high and volatile in the 1970s and the 1980s but low and stable in the most recent period. We explore the dynamics of inflation in these countries via a time-varying factor model. This statistical model is used to describe movements in inflation that are idiosyncratic or country specific and those that are common across countries. In addition, we investigate how comovement has varied across the sample period. Our results indicate that there has been a decline in the level, persistence and volatility of inflation across our sample of industrialised countries. In addition, there has been a change in the degree of comovement, with the level and persistence of national inflation rates moving more closely together since the mid-1980s.

Paper not available.

October 1, 2004

Existing methods for data interpolation or backdating are either univariate or based on a very limited number of series, due to data and computing constraints that were binding until the recent past. Nowadays large datasets are readily available, and models with hundreds of parameters are fastly estimated. We model these large datasets with a factor model, and develop an interpolation method that exploits the estimated factors as an efficient summary of all the available information. The method is compared with existing standard approaches from a theoretical point of view, by means of Monte Carlo simulations, and also when applied to actual macroeconomic series. The results indicate that our method is more robust to model misspecification, although traditional multivariate methods also work well while univariate approaches are systematically outperformed. When interpolated series are subsequently used in econometric analyses, biases can emerge, depending on the type of interpolation but again be reduced with multivariate approaches, including factor-based ones.

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