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Denoised Inflation: A New Measure of Core Inflation

Author

Listed:
  • Muhammad Nadim Hanif

    (State Bank of Pakistan)

  • Javaid Iqbal

    (State Bank of Pakistan)

  • Syed Hamza Ali

    (State Bank of Pakistan)

  • Muhammad Abdus Salam

    (State Bank of Pakistan)

Abstract

Existing measures of core inflation ignore a part of ‘should be’ the core inflation. Exclusion based measures ‘exclude’ a part of persistent inflation inherently existing in the excluded part whereas filter based measures ‘filter-out’ the cyclical part also rather than the irregular component only. This study proposes a new idea to define and measure core inflation – noise free inflation or denoised inflation. As against considering only trend to define core inflation, this study proposes using cyclical component also to be part of core inflation. If core inflation is to be useful, for monetary policy making, as an indicator of underlying inflation, it has to include demand related component of inflation associated with current economic cycle. By using wavelet analysis approach to decompose seasonally adjusted price index into noise, cyclical component and trend, we estimate a denoised inflation series for Pakistan for the period July 1992 to June 2017. Since denoised inflation passes ‘statistical’ as well as ‘theoretical’ tests necessary for a series to be core inflation, we think it can be used as a new core inflation measure for Pakistan. This can also be estimated and tested for any country.

Suggested Citation

  • Muhammad Nadim Hanif & Javaid Iqbal & Syed Hamza Ali & Muhammad Abdus Salam, 2020. "Denoised Inflation: A New Measure of Core Inflation," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(2), pages 131-154.
    • Handle: RePEc:cbk:journl:v:9:y:2020:i:2:p:131-154
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    References listed on IDEAS

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    Cited by:

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    2. Le Dinh Hac & Dinh Tran Ngoc Huy & Nguyen Ngoc Thach & Bui Minh Chuyen & Pham Thi Hong Nhung & Tran Duc Thang & Tran Tuan Anh, 2021. "Enhancing risk management culture for sustainable growth of Asia commercial bank -ACB in Vietnam under mixed effects of macro factors," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 8(3), pages 291-307, March.

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    More about this item

    Keywords

    Estimation of Cyclical Component; Inflation; Monetary Policy;
    All these keywords.

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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