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A First Assessment of Some Measures of Core Inflation for the Euro Area

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  • Juan-Luis Vega
  • Mark A. Wynne

Abstract

Core inflation plays an important role in the deliberations of monetary policy-makers. In this paper we evaluate a number of measures of core inflation constructed using euro-area data. In addition to the traditional exclusion-type core measures, we examine two newer ones, documenting their properties and evaluating their performance in terms of their ability to track underlying or trend inflation in real time. We focus on core measures derived from the Harmonized Index of Consumer Prices (HICP) as the European Central Bank has chosen to define its mandate for price stability in terms of this index, and because this is the only index of consumer prices that is compiled in a comparable manner across all members of the European Union. We document significant excess kurtosis in the cross-section distribution of price changes in the euro area, and show that several categories of prices are more volatile than those typically excluded from traditional measures of core inflation. Contrary to what one might expect, traditional measures of core inflation are not significantly less volatile than headline measures. We document the superior performance of alternative measures of core inflation in tracking trend inflation on average, but show that none of the various measures of core gave significant advance warning of the pickup in trend inflation at the beginning of 1999. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2003.

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Bibliographic Info

Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 4 (2003)
Issue (Month): (08)
Pages: 269-306

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Handle: RePEc:bla:germec:v:4:y:2003:i::p:269-306

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  1. Luis J. Álvarez & María de los Llanos Matea, 1999. "Underlying Inflation Measures in Spain," Banco de Espa�a Working Papers 9911, Banco de Espa�a.
  2. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
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  4. Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers rdp9810, Reserve Bank of Australia.
  5. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
  6. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient inflation estimation," Working Paper 9707, Federal Reserve Bank of Cleveland.
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  10. Bryan, Michael-F & Cecchetti, Stephen-G, 1999. "The Monthly Measurement of Core Inflation in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(1), pages 77-101, May.
  11. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
  12. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
  13. Meyler, Aidan, 1999. "A Statistical Measure Of Core Inflation," Research Technical Papers 2/RT/99, Central Bank of Ireland.
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  15. Luc Aucremanne, 2000. "The use of robust estimators as measures of core inflation," Working Paper Research 02, National Bank of Belgium.
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  17. Franck Sédillot & Hervé Le Bihan, 2002. "Implementing and interpreting indicators of core inflation: the case of France," Empirical Economics, Springer, vol. 27(3), pages 473-497.
  18. Hasan Bakhshi & Tony Yates, 1999. "To trim or not to trim? An application of a trimmmed mean inflation estimator to the United Kingdom," Bank of England working papers 97, Bank of England.
  19. repec:ubc:bricol:95-31 is not listed on IDEAS
  20. Vega, Juan Luis & Wynne, Mark A., 2001. "An evaluation of some measures of core inflation for the euro area," Working Paper Series 0053, European Central Bank.
  21. Aucremanne, L., 2000. "The Use of Robust Estimators as Measures of Core Inflation," Papers 2, Warwick - Development Economics Research Centre.
  22. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 205-228.
  23. Shiratsuka, Shigenori, 1997. "Inflation Measures for Monetary Policy: Measuring the Underlying Inflation Trend and Its Implication for Monetary Policy Implementation," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(2), pages 1-26, December.
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Citations

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Cited by:
  1. Emil Stavrev, 2006. "Measures of Underlying Inflation in the Euro Area," IMF Working Papers 06/197, International Monetary Fund.
  2. Felipe Córdova & María Carolina Grünwald & Michael Pedersen, 2008. "Alternative Measures of Core Inflation in Chile," Working Papers Central Bank of Chile 471, Central Bank of Chile.
  3. Moons, Cindy & Garretsen, Harry & van Aarle, Bas & Fornero, Jorge, 2007. "Monetary policy in the New-Keynesian model: An application to the Euro Area," Journal of Policy Modeling, Elsevier, vol. 29(6), pages 879-902.
  4. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia.
  5. Michael Pedersen, 2006. "An Alternative Measure of Core Inflation," Working Papers Central Bank of Chile 366, Central Bank of Chile.
  6. Maria Arrazola & Jose de Hevia, 2008. "A simple inflation indicator for the euro zone," Applied Economics, Taylor & Francis Journals, vol. 40(18), pages 2387-2394.
  7. Nicholas Apergis & Stephen M. Miller & Alexandros Panethimitakis & Athanassios Vamvakidis, 2005. "Inflation Targeting and Output Growth: Evidence from Aggregate European Data," Working papers 2005-06, University of Connecticut, Department of Economics.
  8. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Working Papers 06-10, Bank of Canada.
  9. Abdul Aleem & Amine Lahiani, 2011. "Estimation and evaluation of core inflation measures," Applied Economics, Taylor & Francis Journals, vol. 43(25), pages 3619-3629.
  10. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among them," IMF Working Papers 06/97, International Monetary Fund.

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