Households' savings in China

This paper studies the determinants of Chinese households’ saving. Domestic saving in China is the highest in the world in terms of GDP and it is mirrored in a large and persistent current account surplus. First, we show that notwithstanding the rising contribution of government and firms to national savings, they stand out because of households’ behaviour. Our econometric analysis proceeds from the work of Modigliani and Cao (2004) that explained rising personal saving in China within the life-cycle hypothesis. We prove that their explanation is insufficient. Then, using panel data and exploiting differences among provinces and between urban and rural households, we show that there is a significant dissimilarity in savings decisions in urban and rural areas and that motives other than those envisaged in the life-cycle model might play a major role, above all precautionary savings and liquidity constraints. Our results suggest that to reduce the propensity to save of Chinese households it is necessary to improve the provision of social services and to facilitate access to credit.China, saving rate, precautionary savings

Forecasting inflation and tracking monetary policy in the euro area: does national information help?

The ECB objective is set in terms of year on year growth rate of the Euro area HICP. Nonetheless, a good deal of attention is given to national data by market analysts when they try to anticipate monetary policy moves. In this paper we use the Generalized Dynamic Factor model to develop a set of core inflation indicators that, combining national data with area wide information, allow us to answer two related questions. The first is whether country specific data actually bear any relevance for the future path of area wide price growth, over and above that already contained in area wide data. The second is whether in order to track ECB monetary policy decisions it is useful to take into account national information and not only area wide statistics. In both cases our findings point to the conclusion that, once area wide information is properly taken into account, there is little to be gained from considering national idiosyncratic developments. JEL Classification: C25, E37, E52dynamic factor model, forecasting, inflation, monetary policy, Taylor rule

Forecasting inflation and tracking monetary policy in the euro area: does national information help?

The ECB objective of price stability is given a quantitative content as a year-on-year growth rate in the euro area HICP close but below 2% over the medium term. While this objective is referred to area-wide price developments, in anticipating monetary policy moves, market analysts pay considerable attention to national data. In this paper we use the Generalized Dynamic Factor Model to derive a set of core inflation indicators that, combining national with area-wide data, allow us to answer two related questions: whether country-specific data are actually relevant to the future path of area-wide inflation once the information contained in area-wide data has been exploited, and whether it is useful, in order to track ECB monetary policy decisions, to factor in national and not only area-wide statistics. In both cases, our findings suggest that, when area-wide information is properly taken into account, there is little to be gained by considering national idiosyncratic developments.Forecast, Dynamic factor model, inflation, monetary policy

The Seasonal Adjustment of the harmonised Index of Consumer Prices for the Euro Area: a Comparison of Direct and Indirect Methods.

Knowledge of the characteristics of the short-term evolution of consumer prices for each country and for their average is important for better monitoring and forecasting of inflation in the euro area. In this paper we seek to verify to what extent the short-term variability of the HICPs can be explained by regular infra-year movements which we then attempt to estimate. We find evidence that seasonal movements characterise most price series, though some differences arise across countries and sub-indices. The seasonal adjustment of these indices raises a number of important questions of aggregation.consumer price index, seasonality.

Nominal Rigidities in an Estimated Two Country

This paper uses bayesian techniques to estimate a small-scale two country model based on the Euro Area and the U.S. data. The model, based on the New Open Economy Macroeconomics framework, is microfounded and characterized by nominal price rigidities, a nontradable sector, home bias in consumption and incomplete financial markets at international level. Two versions of the model are estimated: in one the international law of one price for tradable goods holds, in the other there is international price discrimination. Several results emerge. First, nominal rigidities are quite symmetric across countries. Second, Euro Area and U.S. monetary policies are different; in particular, U.S policy makers seems to be relatively more aggressive against inflation. Third, international spillovers are lowMacroeconomic simulation, Bayesian Estimation, Non-traded goods, Distribution costs

Real exchange rate volatility and disconnect: an empirical investigation

A two-country model that incorporates many features proposed in the New Open Economy Macroeconomics literature is developed in order to replicate the volatility of the real exchange rate and its disconnect with macroeconomic variables. The model is estimated using data for the euro area and the U.S. and Bayesian methods. The analysis delivers the following results: (a) international price discrimination, home bias and shocks to the uncovered interest rate parity (UIRP) condition are key features to replicate the variance of the real exchange rate; (b) home bias, shocks to the UIRP condition and to production technologies help replicating the disconnect;(c) distribution services intensive in local nontradeables are an important source of international price discrimination.International business cycle, Exchange rate volatility, Exchange rate pass-through, International transmission.

A core inflation index for the euro area

This paper proposes an index of core inflation for the euro area which exploits information from a large panel of time series on disaggregated prices, industrial production, labor market indicators, financial and monetary variables. The index is the result of a smoothing operation at both the cross-sectional and time series level. By extracting the common component of national inflation and disregarding the idiosyncratic one, we clean inflation from measurement error, discrepancies in data recording and dynamics originated by national or sectoral idiosyncratic shocks (cross-sectional smoothing). By extracting the component with periodicity longer than one year we clean from high frequency variation and seasonal components which are not relevant for monetary policy (time series smoothing). The indicator is shown to have a number of desirable characteristics and to perform very well as a forecaster of the euro area harmonized consumer price index at one and two years horizon, which is the relevant horizon for the ECB monetary policy.core inflation, dynamic factor model, inflation forecast and monetary policy

New Eurocoin: Tracking Economic Growth in Real Time

Removal of short-run dynamics from a stationary time series to isolate the medium to long-run component, can be obtained by a band-pass filter. However, band pass filters are infinite moving averages and can therefore deteriorate at the end of the sample. This is a well-known result in the literature isolating the business cycle in integrated series. We show that the same problem arises with our application to stationary time series. In this paper we develop a method to obtain smoothing of a stationary time series by using only contemporaneous values of a large dataset, so that no end-of-sample deterioration occurs. Our construction is based on a special version of Generalized Principal Components, which is designed to use leading variables in the dataset as proxies for missing future values in the variable of interest. Our method is applied to the construction of New Eurocoin, an indicator of economic activity for the euro area. New Eurocoin is an estimate, in real time, of the medium to long-run component of the euro area GDP growth, which performs equally well within and at the end of the sample. As our dataset is monthly and most of the series are updated with a short delay, we are able to produce a monthly, real-time indicator. An assessment of its performance as an approximation of the medium to long-run GDP growth, both in terms of fitting and turning-point signaling, is provided.Coincident Indicator, Band-pass Filter, Large-dataset Factor Models, Generalized Principal Components

The construction of coincident and leading indicators for the euro area business cycler of the euro area business cycle

This paper investigates the business cycle properties of the euro area and computes a coincident and a leading indicator of economic activity. We accomplish this by applying the newly introduced generalized factor model to a properly constructed and harmonized data set of short term statistics of the euro area (794 monthly series). Unlike other methods used in the literature, the procedure takes into consideration the cross-country as well as the withincountry correlation structure and exploits all information on dynamic cross-correlations. As a byproduct of our analysis, we provide a characterization of the commonality and dynamic relations of the series in the data set with respect to the coincident indicator and a dating of the euro area cycle.business cycle, dynamic factor model

New Eurocoin: Tracking Economic Growth in Real Time

This paper presents ideas and methods underlying the construction of an indicator that tracks the euro area GDP growth, but, unlike GDP growth, (i) is updated monthly and almost in real time; (ii) is free from hort-run dynamics. Removal of short-run dynamics from a time series, to isolate the mediumlong-run component, can be obtained by a band-pass filter. However, it is well known that band-pass filters, being two-sided, perform very poorly at the end of the sample. New Eurocoin is an estimator of the medium- long-run component of the GDP that only uses contemporaneous values of a large panel of macroeconomic time series, so that no end-of-sample deterioration occurs. Moreover, as our dataset is monthly, New Eurocoin can be updated each month and with a very short delay. Our method is based on generalized principal components that are designed to use leading variables in the dataset as proxies for future values of the GDP growth. As the medium- long-run component of the GDP is observable, although with delay, the performance of New Eurocoin at the end of the sample can be measured.coincident indicator, band-pass filter, large-dataset factor models, generalized principal components