Uncertainty About the Persistence of Inflation

This paper offers several contributions to actual research and discussion on monetary policy. It clarifies the relationship between uncertainty of inflation persistence and optimal monetary policy and discusses the consequences of the recent Blanchard proposal to implement a higher inflation target in the light of parameter uncertainty. Furthermore, it provides insights of general interest on the methodological level by analyzing the interrelations between normalization of variables and their independence properties and by extending standard solution methods of dynamic programming problems to non-orthogonal parameter uncertainty

Shock Identification of Macroeconomic Forecasts Based on Daily Panels

This paper proposes a new procedure for shock identification of macroeconomic forecasts based on factor analysis. Our identification scheme for information shocks relies on data reduction techniques for daily panels and the recognition that macroeconomic releases exhibit a high level of clustering. A large number of data releases on a single day is of considerable practical interest not only for the estimation but also for the identification of the factor model. The clustering of cross-sectional information facilitates the interpretation of the forecast innovations as real or as nominal information shocks. An empirical application is provided for Swiss inflation. We show that (i) the monetary policy shocks generate an asymmetric response to inflation, (ii) the pass-through for consumer price index inflation is weak, and (iii) the information shocks to inflation are not synchronized

Inflation Inequality in Europe

We analyze cross-household inflation dispersion in Europe using fictitious monthly inflation rates for several household categories (grouped according to income levels, household size, socio-economic status, age) for the period from 1997 to 2008. Our analysis is carried out on a panel of 23 up to 27 household-specific inflation rates per country for 15 countries. In the first part of the paper, we employ time series and related non-stationary panel approaches to shed light on cross-country differences in inflation inequality with respect to the number of driving forces in the panel. In particular, we focus on the degree of persistence of the household-specific inflation rates and their the adjustment behaviour towards the inflation rate of a representative household. In the second part of the paper, we pool over the full sample of all countries and test if and by how much certain household categories across Europe are more prone to significant inflation differentials and significant differences in the volatility of inflation. Furthermore we search for the presence of clusters with respect to inflation susceptibility. On the national level, we find evidence for the existence of one main driving factor driving the non-stationarity of the panel and evidence for a single co-integration vector. Persistence of deviations, however, is high, and the adjustment speed towards the representative household is low. Even if there is no concern about a long-run stable distribution, at least in the short- to medium run deviations tend to last. On the European level, we find small but significant differences (mainly along income levels), we can separate 5 clusters and two main driving forces for the differences in the overall panel. All in all, even if differences are relatively small, they are not negligible and persistent enough to represent a serious matter of debate for economic and social policy

Understanding Sectoral Differences in Downward Real Wage Rigidity: Workforce Composition, Institutions, Technology and Competition

This paper examines whether differences in wage rigidity across sectors can be explained by differences in workforce composition, competition, technology and wage-bargaining institutions. We adopt the measure of downward real wage rigidity (DRWR) developed by Dickens and Goette (2006) and rely on a large administrative matched employer-employee dataset for Belgium over the period 1990-2002. Firstly, our results indicate that DRWR is significantly higher for white-collar workers and lower for older workers and for workers with higher earnings and bonuses. Secondly, beyond labour force composition effects, sectoral differences in DRWR are related to competition, firm size, technology and wage bargaining institutions. We find that wages are more rigid in more competitive sectors, in labour-intensive sectors, and in sectors with predominant centralised wage setting at the sector level as opposed to firm-level wage agreements

Forecasting with Big Data: A Review

Big Data is a revolutionary phenomenon which is one of the most frequently discussed topics in the modern age, and is expected to remain so in the foreseeable future. In this paper we present a comprehensive review on the use of Big Data for forecasting by identifying and reviewing the problems, potential, challenges and most importantly the related applications. Skills, hardware and software, algorithm architecture, statistical significance, the signal to noise ratio and the nature of Big Data itself are identified as the major challenges which are hindering the process of obtaining meaningful forecasts from Big Data. The review finds that at present, the fields of Economics, Energy and Population Dynamics have been the major exploiters of Big Data forecasting whilst Factor models, Bayesian models and Neural Networks are the most common tools adopted for forecasting with Big Data

Downward Wage Rigidity for Different Workers and Firms: An Evaluation for Belgium Using the IWFP Procedure

This paper evaluates the extent of downward nominal and real wage rigidity for different categories of workers and firms using the methodology recently developed by the International Wage Flexibility Project (Dickens and Goette, 2006). The analysis is based on an administrative data set on individual earnings, covering one-third of employees of the private sector in Belgium over the period 1990-2002. Our results show that Belgium is characterised by strong real wage rigidity and very low nominal wage rigidity, consistent with the Belgian wage formation system of full indexation. Real rigidity is stronger for white-collar workers than for blue-collar workers. Real rigidity decreases with age and wage level. Wage rigidity appears to be lower in firms experiencing downturns. Finally, smaller firms and firms with lower job quit rates appear to have more rigid wages. Our results are robust to alternative measures of rigidit