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Elke Hahn

21 September 2021
OCCASIONAL PAPER SERIES - No. 265
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Abstract
This paper – which takes into consideration overall experience with the Harmonised Index of Consumer Prices (HICP) as well as the improvements made to this measure of inflation since 2003 – finds that the HICP continues to fulfil the prerequisites for the index underlying the ECB’s definition of price stability. Nonetheless, there is scope for enhancing the HICP, especially by including owner-occupied housing (OOH) using the net acquisitions approach. Filling this long-standing gap is of utmost importance to increase the coverage and cross-country comparability of the HICP. In addition to integrating OOH into the HICP, further improvements would be welcome in harmonisation, especially regarding the treatment of product replacement and quality adjustment. Such measures may also help reduce the measurement bias that still exists in the HICP. Overall, a knowledge gap concerning the exact size of the measurement bias of the HICP remains, which calls for further research. More generally, the paper also finds that auxiliary inflation measures can play an important role in the ECB’s economic and monetary analyses. This applies not only to analytical series including OOH, but also to measures of underlying inflation or a cost of living index.
JEL Code
C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation
C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection
C82 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Data Access
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
24 March 2021
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 2, 2021
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Abstract
Profit margins are an integral part of domestic price setting and have had an impact on the response of euro area inflation to the COVID-19 shock. While profits have fallen more strongly during the COVID-19 crisis than during earlier recessions, profit margins have shown an unusually high degree of resilience relative to the depth of the recession. The resilience of profit margins likely reflects the normal resilience of profit margins observed in recessions and, in addition, the impact of job retention schemes.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
30 October 2020
WORKING PAPER SERIES - No. 2485
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Abstract
This paper explores whether the transmission mechanism between wages and prices in the euro area is affected by the growth regime. Since the great financial crisis inflation developments have posed major puzzles to economists as inflation declined by less than was widely expected during the past recessions and rose by less during the subsequent recoveries. This paper analyses whether the wage-price pass-through may have contributed to these inflation puzzles. Applying the Threshold VAR model proposed by Alessandri and Mumtaz (2017) to the analysis of the wage-price pass-through, the paper examines whether the transmission mechanim of different types of shocks differs between recessions and expansions. The results point to differences in the wage-price pass-through between growth regimes for demand shocks but not for wage mark-up shocks. They show a much smaller response of prices relative to wages, i.e. a smaller wage-price pass-through, for demand shocks in recessions than in expansions. This is accounted for by a smaller relative response of profit margins. More generally, the results suggest that the slope of the price Phillips curve flattens in recessions on account of the lower wage-price pass-through, while the wage Phillips curve appears to be broadly stable across growth regimes. Overall, the results contribute to solve or diminish the puzzle of the missing disinflation of the past two recessions suggesting that inflation should be expected to recede by less during recessions than indicated by standard linear models.
JEL Code
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General
26 September 2019
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 6, 2019
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Abstract
Profits can account for a significant part of domestic price formation and affect the pass-through of changes in costs to final prices. National accounts contain a broad measure of profits, gross operating surplus, which can tell us more about the role of profits for domestic price pressures, as measured in the GDP deflator. This box illustrates how profits have recently shaped domestic price pressures in the euro area. It explains which factors are the main drivers of the movements in profit margins and discusses how they have likely contributed to their recent developments.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development
14 September 2018
WORKING PAPER SERIES - No. 2175
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Abstract
This paper develops Area-wide Leading Inflation CyclE (ALICE) indicators for euro area headline and core inflation with an aim to provide early signals about turning points in the respective inflation cycle. The series included in the two composite leading indicators are carefully selected from around 160 candidate leading series using a general-to-specific selection process. The headline ALICE includes nine leading series and has a lead time of 3 months while the core ALICE consists of seven series and leads the reference cycle by 4 months. The lead times of the indicators increase to 5 and 9 months, respectively, based on a subset of the selected leading series with longer leading properties. Both indicators identify main turning points in the inflation cycle ex post and perform well in a simulated real-time exercise over the period from 2010 to the beginning of 2018. They also have performed well in forecasting the direction of inflation. In terms of the quantitative forecast accurracy, the headline ALICE has on average performed broadly similarly to the Euro Zone Barometer survey, slightly worse than the Eurosystem/ECB Staff macroeconomic projections and better than the Random Walk model, albeit this is not the case for the core ALICE.
JEL Code
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
7 August 2018
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 5, 2018
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Abstract
In current forecasts and projections, a pick-up in labour costs is considered an important precondition for a sustained increase in underlying inflation. However, the signals provided by different labour cost indicators have been mixed for some time. While wage growth as measured by compensation per employee or by compensation per hour worked has clearly strengthened over the past two years, unit labour cost growth, i.e. wage growth adjusted for productivity growth, has remained rather flat over the same period. This begs the question: which labour cost indicators provide the relevant signal for the pass-through to, and the outlook for, underlying inflation? This box tries to shed some light on this issue by analysing the transmission of two different types of macroeconomic impulse, namely certain kinds of supply and demand shock, in the context of the New Area-Wide Model, and by comparing the results with the patterns of development observed in the recent past.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General
27 June 2018
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 4, 2018
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Abstract
Exchange rate developments can play an important role in shaping the outlook for HICP inflation. As a change in the exchange rate can affect consumer prices with considerable delays and as the impact can depend on the economic situation at the time, assessing the exchange rate pass-through requires constant monitoring. Between April 2017 and May 2018, the exchange rate of the euro appreciated by about 8% in nominal effective terms and by about 10% against the US dollar. This box briefly recalls how exchange rate changes are transmitted to consumer prices in the euro area. The box also looks at indicators at different stages of the pricing chain to gauge the degree of the pass-through at the current juncture. The focus is on the monitoring of the pass-through to exchange rate-sensitive components of the HICP excluding energy and food.
JEL Code
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
14 June 2011
WORKING PAPER SERIES - No. 1356
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Abstract
This paper explores the role of oil prices in the euro area economy since the 1970s by applying a VAR framework with time varying parameters and stochastic volatility in which oil supply and global demand shocks are identified. Our results show that both types of shock contributed substantially to the oil price surges during historical oil crises and likewise to those over the past decade. Counterfactual histories of the price and activity variables, moreover, reveal much larger adverse contributions of both shocks to HICP inflation and GDP in the first half of the sample than in the second, which suggests that changes related to these shocks have contributed to the Great Moderation. Impulse responses, moreover, show that a decline in the pass through of the two shocks has added to the moderating contribution over time, while variance decompositions indicate no change in the relative importance of the two shocks overtime.
JEL Code
E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
22 September 2010
WORKING PAPER SERIES - No. 1246
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Abstract
This study develops a new monthly euro Area-wide Leading Indicator (ALI) for the euro area business cycle. It derives the composite ALI by applying a deviation cycle methodology with a one-sided band pass filter and choosing nine leading series. Our main findings are that i) the applied monthly reference business cycle indicator (BCI) derived from industrial production excluding construction is close to identical to the real GDP cycle, ii) the ALI reliably leads the BCI by 6 months and iii) the longer leading components of the ALI are good predictors of the ALI and therefore the BCI up to almost a year ahead and satisfactory predictors by up to 2 years ahead. A real-time analysis for predicting the euro business cycle during the 2008/2009 recession and following recovery confirms these findings.
JEL Code
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
9 January 2009
OCCASIONAL PAPER SERIES - No. 100
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Abstract
The first part of this paper provides a brief survey of the recent literature that employs survey data on household finance and consumption. Given the breadth of the topic, it focuses on issues that are particularly relevant for policy, namely: i) wealth effects on consumption, ii) housing prices and household indebtedness, iii) retirement income, consumption and pension reforms, iv) access to credit and credit constraints, v) financial innovation, consumption smoothing and portfolio selection and vi) wealth inequality. The second part uses concrete examples to summarise how results from such surveys feed into policy-making within the central banks that already conduct such surveys.
JEL Code
C42 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Survey Methods
D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis
D14 : Microeconomics→Household Behavior and Family Economics→Household Saving; Personal Finance
Network
Eurosystem Monetary Transmission Network
10 December 2008
WORKING PAPER SERIES - No. 975
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Abstract
This paper derives forecasts for euro area real GDP growth based on a bottom up approach from the production side. That is, GDP is forecast via the forecasts of value added across the different branches of activity, which is quite new in the literature. Linear regression models in the form of bridge equations are applied. In these models earlier available monthly indicators are used to bridge the gap of missing GDP data. The process of selecting the best performing equations is accomplished as a pseudo real time forecasting exercise, i.e. due account is taken of the pattern of available monthly variables over the forecast cycle. Moreover, by applying a very systematic procedure the best performing equations are selected from a pool of thousands of test bridge equations. Our modelling approach, finally, includes a further novelty which should be of particular interest to practitioners. In practice, forecasts for a particular quarter of GDP generally spread over a prolonged period of several months. We explore whether over this forecast cycle, where GDP is repeatedly forecast, the same set of equations or different ones should be used. Changing the set of bridge equations over the forecast cycle could be superior to keeping the same set of equations, as the relative merit of the included monthly indictors may shift over time owing to differences in their data characteristics. Overall, the models derived in this forecast exercise clearly outperform the benchmark models. The variables selected in the best equations for different situations over the forecast cycle vary substantially and the achieved results confirm the conjecture that allowing the variables in the bridge equations to differ over the forecast cycle can lead to substantial improvements in the forecast accuracy.
JEL Code
C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes
C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E27 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Forecasting and Simulation: Models and Applications
21 August 2007
WORKING PAPER SERIES - No. 796
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Abstract
This paper investigates the impact of exchange rate shocks on sectoral activity and prices in the euro area. Using a VAR framework it provides evidence on the magnitude and speed of the impact of exchange rate shocks on activity in all main euro area sectors and on activity and producer prices in a large set of sub-sectors of industry (excluding construction). Substantial heterogeneity in the impact of exchange rate shocks across sectors is identified as regards both activity and prices. According to our results, among the main euro area sectors an exchange rate shock has the strongest impact on value added in industry (excl. construction) and trade and transportation services. Within industry (excl. construction), among its main sub-sectors all of the impact on production comes via manufacturing, while among the main industrial groupings (MIGs), capital and intermediate goods production respond most strongly. As regards the impact on prices, among the sub-sectors of industry (excl. construction), the impact is largest on producer prices in electricity, gas and water supply, and in line with this producer prices in MIG energy are most sensitive to an exchange rate shock.
JEL Code
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
21 March 2007
WORKING PAPER SERIES - No. 739
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Abstract
This paper examines the degree of Exchange Rate Pass-Through (ERPT) to prices in 12 emerging markets in Asia, Latin America, and Central and Eastern Europe. Our results, based on three alternative vector autoregressive models, partly overturn the conventional wisdom that ERPT into both import and consumer prices is always higher in "emerging" than in "developed" countries. For emerging markets with only one digit inflation (most notably the Asian countries), passthrough to import and consumer prices is found to be low and not very dissimilar from the levels of developed economies. The paper also finds robust evidence for a positive relationship between the degree of the ERPT and inflation, in line with Taylor's hypothesis once two outlier countries (Argentina and Turkey) are excluded from the analysis. Finally, the presence of a positive link between import openness and ERPT, while plausible theoretically, finds only weak empirical support.
JEL Code
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
1 July 2003
WORKING PAPER SERIES - No. 243
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Abstract
This paper investigates the pass-through of external shocks, i.e. oil price shocks, exchange rate shocks, and non-oil import price shocks to euro area inflation at different stages of distribution (import prices, producer prices and consumer prices). The analysis is based on a VAR model that includes the distribution chain of pricing. According to our results the pass-through is largest and fastest for non-oil import price shocks, followed by exchange rate shocks and oil price shocks. The size and the speed of the pass-through of these shocks decline along the distribution chain. External shocks explain a large fraction of the variance in all price indices. They seem to have contributed largely to inflation in the euro area since the start of the European Monetary Union. The results on the size and the speed of the pass-through in the euro area appeared to be robust over time and different identification schemes.
JEL Code
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation