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Underlying Inflation in Australia: Are the Existing Measures Satisfactory?

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  • ROBERT DIXON
  • G.C. LIM

Abstract

A number of measures of the underlying rate of inflation are reported for Australia. We formulate criteria that an acceptable underlying rate must satisfy and then test to see whether any of the current measures satisfy these criteria. We find that for the period since inflation targeting began, none of the underlying series satisfy all criteria. We then examine the results of an 'Unobserved Components' decomposition and show that it not only provides useful information on underlying inflation in Australia, but also provides support for the decision, in 1998, of the Reserve Bank of Australia to switch the target from an underlying series to the headline rate itself. Copyright © 2004 Economic Society of Australia..

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Bibliographic Info

Article provided by The Economic Society of Australia in its journal The Economic Record.

Volume (Year): 80 (2004)
Issue (Month): 251 (December)
Pages: 373-386

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Handle: RePEc:bla:ecorec:v:80:y:2004:i:251:p:373-386

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  1. Carlos Robalo Marques & Pedro Duarte Neves & Luís Morais Sarmento, 2000. "Evaluating Core Inflation Indicators," Working Papers, Banco de Portugal, Economics and Research Department w200003, Banco de Portugal, Economics and Research Department.
  2. James Morley & Charles Nelson & Eric Zivot, 2003. "Why are Beveridge-Nelson and Unobserved-component decompositions of GDP so Different?," Working Papers, University of Washington, Department of Economics UWEC-2002-18-P, University of Washington, Department of Economics.
  3. James C. Morley & Charles R. Nelson & Eric Zivot, 2003. "Why Are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP So Different?," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 235-243, May.
  4. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 165-93, January.
  5. Carlos Robalo Marques & Pedro Duarte Neves & Afonso Gonçalves da Silva, 2000. "Why Should Central Banks Avoid the Use of the Underlying Inflation Indicator?," Working Papers, Banco de Portugal, Economics and Research Department w200005, Banco de Portugal, Economics and Research Department.
  6. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
  7. Guy Debelle, 1998. "Inflation Targeting in Practice," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ23, June.
  8. Cogley, Timothy, 2002. "A Simple Adaptive Measure of Core Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 34(1), pages 94-113, February.
  9. Morley, James C., 2002. "A state-space approach to calculating the Beveridge-Nelson decomposition," Economics Letters, Elsevier, vol. 75(1), pages 123-127, March.
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Cited by:
  1. Lei Lei Song, 2005. "Do underlying measures of inflation outperform headline rates? Evidence from Australian data," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(3), pages 339-345.
  2. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers, Reserve Bank of Australia rdp2005-05, Reserve Bank of Australia.
  3. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Working Papers, Bank of Canada 06-10, Bank of Canada.
  4. Rachel Holden, 2006. "Measuring core inflation," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 7p, December.
  5. David Shepherd & Robert Dixon, 2008. "The Cyclical Dynamics and Volatility of Australian Output and Employment," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 84(264), pages 34-49, 03.
  6. Lei Lei Song, 2003. "The Role of the Unit of Analysis in Tax Policy Reform Evaluations," Melbourne Institute Working Paper Series wp2003n29, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.

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