Resumen de Spanish diffusion indexes

Máximo Camacho, F. Israel Sancho

• 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.