Giovanni Veronese

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.

Monetary policy in India: is something amiss?

Purpose - Indian monetary policy performed reasonably well in the past, while both strategy and operational framework were evolving on par with domestic financial and monetary markets. The purpose of this paper is to document how this good track record came to an abrupt stop in recent years as inflation rose sharply and, more worryingly, expected inflation followed suit. Design/methodology/approach - This paper has analytical, empirical and policy dimensions. Given the recent surge in inflation in India, as well as in inflation expectations, a discussion of the role of monetary policy is needed. This is presented by resorting to survey evidence on expectations as well as to indirect evidence inferred from the market reactions to macroeconomic news. Findings - The authors documented the unhinging of inflation expectations in India in the aftermath of the financial crisis. The evidence gathered leads to the conclusion that both the monetary policy strategy and framework of the Reserve Bank of India would benefit from further evolution in the direction of a precisely defined and overarching objective (price stability), instead of the present multiplicity of goals, and of a well-defined operating target, enhancing the transparency, communication and signalling effect of policy moves. The authors suggest that embracing a flexible inflation targeting approach is a possible solution. Originality/value - This is a highly topical issue that has attracted a great deal of attention in policy discussions, both in India and in the region. Very few papers combine the analytical and empirical considerations in this topic.

Forecaster Heterogeneity, Surprises and Financial Markets

We analyze the impact of US macroeconomic surprises and forecaster heterogeneity on the USD/EUR exchange rate and US and German long-term interest rates from 1999 to 2014. We show how a direct proxy of macroeconomic disagreement, given by the heterogeneity of beliefs among forecasters regarding the upcoming macroeconomic release, matters to explain the daily and intra-day movements. Surprises impact more strongly long-term yields and the exchange rate when forecaster heterogeneity is smaller. This result, holds for the main US macroeconomic surprises and is robust to the frequency of the data used in the estimation. However the sensitivity changes with the sample. To this end, we show how estimating the same regressions in a pre-crisis period, a crisis period, and an unconventional monetary policy period there is evidence of time variation in the responses: unconventional monetary policies attenuated the response of the exchange rate to US macroeconomic news, while no major change occurred for long-term interest rates in the US and in the euro area. The disagreement regimes remain relevant in determining an asymmetric response of these asset prices. Our finding underscores the importance of considering beliefs heterogeneity to describe the behavior of asset prices even at high frequency.

Monetary Policy Surprises over Time

We document how the impact of monetary surprises in the euro area and the US on financial markets has changed since 1999. We use a definition of monetary policy surprises that singles out movements in the long end of the yield curve, rather than those that change nearby futures on the central bank reference rates. By focusing only on this component of monetary policy our results are more comparable over time. We find a hump-shaped response of the yield curve to monetary policy surprises, both in the pre-crisis period and since 2013. During the crisis years, Fed path-surprises, largely through their effect on term premia, account for the impact on interest rates, which is found to be increasing in tenor. In the euro area, the path-surprises reflect shifts in sovereign spreads and have a large impact on the entire constellation of interest rates, exchange rates and equity markets.

Tracking the Economy in the Largest Euro Area Countries: a Large Datasets Approach

The paper proposes a set of monthly business (growth-) cycle indicators for Germany, France, Italy and the euro area useful for ex post characterization of the cycle, and, most importantly, to assess the current economic outlook. These indicators are projections of quarterly aggregates on the space spanned by a set of regressors extracted from a large panel of monthly series. Being based on static linear combinations of monthly series, they do not suffer from the end-of-sample problem associated with traditional bilateral filters (HP filter). The indicators are used to: (1) study the degree of co-movement and synchronization across economies; (2) derive a dating of the cycle; (3) obtain the ‘stylized’ cyclical facts; (4) assess the predictive content of the panel for GDP growth. The monthly indicators are good forecasters of GDP performing often better than other simple methods. As expected, since the growth cycle indicator is a ‘smoothed’ estimate of the GDP growth, the best forecasts are obtained in terms of year-on-year (rather than quarter-on-quarter) GDP growth.