Price Stability in the European Union: A Systemic Approach Using Random Matrix Theory

Abstract:Price stability remains a pillar in monetary policy practices and carries a special importance within monetary unions. Mainstream economics tried to leverage price stability using price indices and several metrics to shed light on specific dynamics and optimal macroeconomic levels. The wide availability of data led researchers to consider the study of systems using Random Matrix Theory, based on inner correlation patterns. This aims to enhance the multivariate analysis by removing noisy patterns from the signal and improve data quality for further inferences. This work considers the collection of monthly inflation indices in the Eurozone as a \textit{system} of prices to analyze its eigenvalues' statistical and asymptotic properties and uncover inner country-level insights. Results confirm the system cannot assumed to be randomly generated, and the data exhibit noise-dominated patterns, due to small and persistent variations at the country-level. The latter make the inter-country correlations more dynamic and the separation of the signal from the noise quiet difficult. Findings identified two countries as distorting inflation dynamics besides three other distinct, regional-based groups of countries. Variability sources might stem from economic episodes fueling inflation spikes in some countries, as well as methodological aspects used to ensure data quality and representativeness in the European Union. Despite being complex, the system demonstrates a certain stability, in terms of self-organization; while large monthly fluctuations cannot be considered as rare events, but part of the data-generating process.

Machine Learning (cs.LG); Econometrics (econ.EM); Applications (stat.AP); Methodology (stat.ME)

arXiv:2609.35011 [cs.LG]

(or arXiv:2609.35011v1 [cs.LG] for this version)

https://doi.org/10.48550/arXiv.2609.35011 Focus to learn more arXiv-issued DOI via DataCite (pending registration)

arXivLabs is a framework that allows collaborators to develop and share new arXiv features directly on our website.

Both individuals and organizations that work with arXivLabs have embraced and accepted our values of openness, community, excellence, and user data privacy. arXiv is committed to these values and only works with partners that adhere to them.

Have an idea for a project that will add value for arXiv's community? Learn more about arXivLabs.