Working Paper: CEPR ID: DP8357
Authors: Günter Beck; Kirstin Hubrich; Massimiliano Marcellino
Abstract: We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimate of the sectoral factor in comparison with previous literature, which decomposes price changes into an aggregate and idiosyncratic component only, and interprets the latter as sectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to the sector-specific factors. We conclude that sectoral price changes have a "geographical" dimension, that leads to new insights regarding the properties of sectoral price changes.
Keywords: Common factor models; Disaggregated prices; Euro area; Regional inflation; Sectoral inflation
JEL Codes: C38; D4; E31; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| country-specific factors (F29) | inflation rates (E31) |
| regional factors (R11) | inflation rates (E31) |
| sectoral price changes (E30) | inflation rates (E31) |
| sectoral component (L52) | inflation rates (E31) |
| sectoral component persistence (E20) | sectoral price changes (E30) |