Spanish diffusion indexes

Abstract.We use the Stock-Watson diffusion index methodology to summarize the information contained in a wide set of monthly series (published in the Statistical Bulletin of the Bank of Spain) by means of a reduced number of factors. We find that the first two factors may be used as indicators of the core inflation and the business cycle dynamics of the Spanish economy, respectively. In addition, we study the effects of incorporating large information sets for the analysis of monetary policy. Finally, we show that forecasting prices and output with our factors outperforms other standard alternative forecasting procedures.

[1]  Mark W. Watson,et al.  Advances in Economics and Econometrics: Macroeconomic Forecasting Using Many Predictors , 2003 .

[2]  M. Hallin,et al.  The Generalized Dynamic-Factor Model: Identification and Estimation , 2000, Review of Economics and Statistics.

[3]  Agustín Maravall,et al.  Estimation of the business cycle: A modified Hodrick-Prescott filter , 1999 .

[4]  D. Osborn,et al.  Business Cycles for G7 and European Countries , 1997 .

[5]  J. Stock,et al.  Interpreting Evidence on Money-Income Causality , 1987 .

[6]  J. Stock,et al.  A dynamic factor model framework for forecast combination , 1999 .

[7]  J. Stock,et al.  Macroeconomic forecasting in the Euro area: Country specific versus area-wide information , 2003 .

[8]  J. Stock,et al.  Macroeconomic Forecasting Using Diffusion Indexes , 2002 .

[9]  Daniel E. Sichel.  Business cycle asymmetry: a deeper look , 1993 .

[10]  Ricardo Mestre,et al.  Diffusion Index-Based Inflation Forecasts for the Euro Area , 2002, SSRN Electronic Journal.

[11]  Philip W. Lowe,et al.  The Smoothing of Official Interest Rates , 1997 .

[12]  Juan J. Dolado,et al.  COINTEGRA TION AND UNIT ROOTS , 1990 .

[13]  Ricardo Mestre,et al.  A Multi-Country Trend Indicator for Euro Area Inflation: Computation and Properties , 2001, SSRN Electronic Journal.

[14]  Hans-Martin Krolzig,et al.  The European Business Cycle , 2004 .

[15]  Marco Lippi,et al.  Coincident and leading indicators for the Euro area , 2001 .

[16]  John Geweke,et al.  Maximum Likelihood "Confirmatory" Factor Analysis of Economic Time Series , 1981 .

[17]  Maximo Camacho,et al.  This is What Leading Indicators Lead , 2000 .