Underlying inflation and asymmetric risks

Underlying inflation and asymmetric risks

Series: Working Papers. 2319.

Author: Hervé Le Bihan, Danilo Leiva-León and Matías Pacce.

Topics: Quantitative methods | Prices and margins | Inflation | Macroeconomic projections | Uncertainty | Financial risks.

Published in Finance Research Letters , v. 62, Part B, April 2024, 105149Opens in new window

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Abstract

We propose a new measure of underlying inflation that provides real-time information on asymmetric risks in the outlook for inflation. The asymmetries are generated by nonlinearities induced by economic activity. The new indicator is based on a multivariate regime-switching framework estimated using disaggregated sub-components of euro area HICP and has several additional advantages. First, it is able to swiftly infer abrupt changes in underlying inflation. Second, it helps track turning points in underlying inflation on a timely basis. Third, the proposed indicator also performs satisfactorily vis-à-vis several criteria relevant to inflation monitoring.

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