On the Use of the First Principal Component as a Core Inflation Indicator

This paper investigates if the (OLS-scaled) first principal component (PC1), extracted from standardized yearly rates of change of basic items of the CPI, represents a reasonable option for a core inflation indicator. The evaluation is carried out by (i) confronting alternative linear transformations of the original variables; (ii) analyzing the impact of stacking lagged variables to the original database; and (iii) exploring the contents of the remaining principal components. An orthogonal factor model framework will also be introduced so as to fully reproduce any variable that can be expressed as a linear combination of the original input variables, such as, in this case, the overall inflation rate. The model incorporates the following properties: (i) the results are not conditional on the eigenvectors length; (ii) the variance of the CPI accounted for by each component is unique, and (iii) the outcome is equivalent to an OLS regression between the CPI and the PC1. Along with empirical evidence for the Portuguese case, it will be claimed that the above-mentioned (OLS-scaled) PC1 does capture the general movement of the overall inflation rate, however, no OLS regression would have to be implemented if the core indicator is fully aligned with the orthogonal factor model.

Forecasting investment: A fishing contest using survey data

This paper assesses the usefulness of business surveys as a source of information for investment developments in Portugal. This will be achieved by what will be named a “fishing contest”, where the “participants” are bridge models, models based on principal components (derived from standard and non-standard methods), and models built with the outcome of partial least squares regressions. All models, based on quarterly data, are estimated using a general-to-specific approach and are designed to produce 1 to 4 out-of-sample direct forecasts. The accuracy of these forecasts is then compared with the one of autoregressive processes. The empirical evidence indicates that, in general, there is always a participant in the fishing context that produces a lower out-of-sample Root Mean Squared Error (RMSE) than the one associated with the autoregressive benchmark. In most cases, the combination of autoregressive processes with each participant reduces the RMSE further. A striking outcome is the relative accuracy of bridge models.

International Trade Patterns over the Last Four Decades: How does Portugal Compare with other Cohesion Countries?

This paper compares the international trade pattern of Portugal with the other three EU15 Cohesion countries - Spain, Greece and Ireland - over the last forty years. The paper adopts a fact-finding approach, investigating the degree of openness of these economies and making extensive use of the standard Balassa (1965) index to assess the technological content of these countries' manufacturing trade. In order to infer on international trade specialization and on the persistence of trade patterns, the paper provides empirical evidence on the shape of the cross-sector distribution of 120 manufacturing exports and examines the intra-distribution dynamics. The Balassa index is also computed using import data, which allows for an assessment on the similitude of relative import structures and a crude identification of major vertical specialization activities. The paper concludes that there was a significant increase in the degree of openness of all economies, particularly in Ireland. Over the last four decades, Portugal shows a tendency to reduce its overall extent of export specialization, but significant differences with the world average still remain. The same behaviour is found in Greece and, more strongly, in Spain, which is the least specialized country. Conversely, Ireland shows the strongest export specialization and there is evidence of an increase in the last twenty years. The overall degree of specialization is higher on the export than on the import side, as the four countries analyzed show an import structure very close to the world average in the 2000-04 period. In the Portuguese case, we also find evidence that the degree of persistence of export patterns is higher than that of imports, in particular over longer horizons.

Relative Export Structures and Vertical Specialization: A Simple Cross-Country Index

Relative export structures have changed substantially over the last forty years. We map these changes using a new cross-country specialization index - the B* -, defined as the export weight of a given product on total domestic exports, “normalized” by the average weight across all countries of the world. This indicator is close to the Revealed Comparative Advantage index suggested in Balassa (1965); it has been used as an intermediate calculation in some papers but it has never been highlighted or interpreted as an alternative index in its own right. We provide empirical evidence on the shape of the distribution of the B* for different technological sectors (high, medium-high, medium-low and low-technology sectors), how it has evolved through time and how its intra-distribution dynamics behave. The results indicate a relatively important degree of persistence, although the cross-country specialization distributions depict substantial differences as we move up the technology ladder. Special attention is given to the G5 countries and China. These economies are relatively more specialized in high-tech and medium high-tech products. China shows a striking increase in specialization in high-tech products and a substantial decrease in low-tech. Finally, by computing the B* for both exports and imports, we have identified countries with significant vertical specialization activities. These activities are predominant in high-tech industries and seem to be geographically concentrated in East-Asia.