Fabrizio Venditti

Short-Term GDP Forecasting With a Mixed-Frequency Dynamic Factor Model With Stochastic Volatility

In this article, we develop a mixed frequency dynamic factor model in which the disturbances of both the latent common factor and of the idiosyncratic components have time-varying stochastic volatilities. We use the model to investigate business cycle dynamics in the euro area and present three sets of empirical results. First, we evaluate the impact of macroeconomic releases on point and density forecast accuracy and on the width of forecast intervals. Second, we show how our setup allows to make a probabilistic assessment of the contribution of releases to forecast revisions. Third, we examine point and density out of sample forecast accuracy. We find that introducing stochastic volatility in the model contributes to an improvement in both point and density forecast accuracy. Supplementary materials for this article are available online.

Do food commodity prices have asymmetric effects on Euro-Area inflation?

This paper analyzes the relationship between commodity prices and consumer food prices in the euro area and in its largest economies (Germany, France and Italy) and tests whether the latter respond asymmetrically to shocks to the former. The issue is of particular interest for those monetary authorities that target headline consumer price inflation, which has been heavily influenced by pronounced swings in international commodity prices in the past decade. The empirical analysis is based on two distinct but complementary approaches. First, we employ a structural model to identify a shock to commodity prices and verify using formal econometric tests whether the Impulse Response Functions of food consumer prices is invariant to the sign of the commodity price shock. Next, we employ predictive regressions and examine the relative forecasting ability of linear models compared with that of models that allow for sign-dependent nonlinearities. Overall, the empirical analysis uncovers very little evidence of asymmetries.

The time varying effect of oil price shocks on euro-area exports

In this paper we provide novel evidence on changes in the relationship between the real price of oil and real exports in the euro area. By combining robust predictions on the sign of the impulse responses obtained from a theoretical model with restrictions on the slope of the oil demand and oil supply curves, we identify oil supply and foreign productivity shocks in a time varying VAR with stochastic volatility. We find that from the 1980s onwards the relationship between oil prices and euro area exports has become less negative conditional on oil supply shortfalls and more positive conditional on foreign productivity shocks. Using the theoretical model we show that our empirical findings can be accounted for by (i) stronger trade relationship between the euro area and emerging economies (ii) a decrease in the share of oil in production and (iii) increased competitive pressures in the product market.

Surprise! Euro Area Inflation Has Fallen

Between 2013 and 2014, following the recession triggered by the sovereign debt crisis, euro-area inflation decreased sharply. Although a fall in the inflation rate was to be expected, given the severity of the recession, professional forecasters failed to anticipate it. A possible explanation for this forecast failure lies in a break in the cyclicality of inflation, which was unaccounted for in forecasting models. We probe this explanation in the context of a simple backward-looking Phillips curve and find that the sensitivity of inflation to the output gap has recently increased. We rationalize this result through a structural model, in which a steepening of the Phillips curve arises either from lower nominal rigidities (a decrease in the average duration of prices) or from fewer strategic complementarities in price-setting due to a reduction in the number of firms in the economy.

Forecasting Economic Activity with Higher Frequency Targeted Predictors

In this paper we explore the performance of bridge and factor models in forecasting quarterly aggregates in the very short-term subject to a pre-selection of monthly indicators. Starting from a large information set, we select a subset of targeted predictors using data reduction techniques as in Bai and Ng (2008). We then compare a Diffusion Index forecasting model as in Stock and Watson (2002), with a Bridge model specified with an automated General-To-Specific routine. We apply these techniques to forecasting Italian GDP growth and its main components from the demand side and find that Bridge models outperform naive forecasts and compare favorably against factor models. Results for France, Germany, Spain and the euro area confirm these findings.

Wages and Prices in Italy During the Crisis: The Firms’ Perspective

Following the two surveys carried out in 2007 and 2009 on firms’ price and wage setting practices, in June 2013 the ESCB’s Wage Dynamics Network (WDN) conducted a third survey aimed at assessing, through a harmonised questionnaire, the most important transformations under way in the national labour markets. This paper documents the results of the survey carried out in Italy. The sovereign debt crisis severely hit the Italian economy, causing a collapse in demand, increased uncertainty and difficulties in accessing external finance. Firms responded by decreasing labour input (adjusting both the intensive and the extensive margins) more often than wages. However, wage-setting practices were also affected by the new economic landscape: the percentage of workers employed in firms enacting wage freezes or cuts has steadily increased since 2010, reaching 17% of the total workforce in the sectors considered in 2013. Furthermore, a large share of companies have adapted their pricing strategy to the new economic environment; the frequency of price adjustments has increased, mainly as a reaction to stronger competition.

A daily indicator of economic growth for the euro area

In this paper, we study alternative methods to construct a daily indicator of growth for the euro area. We aim for an indicator that (i) provides reliable predictions, (ii) can be easily updated at the daily frequency, (iii) gives interpretable signals, and (iv) it is linear. Using a large panel of daily and monthly data for the euro area we explore the performance of two classes of models: bridge and U-MIDAS models, and different forecast combination strategies. Forecasts obtained from U-MIDAS models, combined with the inverse MSE weights, best satisfy the required criteria.