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A critical assessment of existing estimates of US core inflation

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  • Bermingham, Colin
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    Abstract

    Core inflation rates are widely calculated. The perceived benefit of core inflation rates is that they help to inform monetary policy. This is achieved by uncovering the underlying trend in inflation or by helping to forecast inflation. Studies which compare core inflation rates frequently assess candidate core rates on these two criteria. Using US data, the two standard tests of core inflation - the ability to track trend inflation and the ability to forecast inflation - are applied to a more comprehensive set of core inflation rates than has been the case in the literature to date. Furthermore, the tests are applied in a more rigorous fashion. A key difference in this paper is the inclusion of benchmarks to the tests, which is non-standard in the literature. Two problems with core inflation rates emerge. Firstly, it is very difficult to distinguish between different core rates according to these tests, as they tend to perform to a very similar level. Secondly, once the benchmarks are introduced to the tests, the core inflation rates fail to outperform the benchmarks. This failure suggests that core inflation rates are of less practical usefulness than previously thought.

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    File URL: http://www.sciencedirect.com/science/article/B6X4M-507BHJ0-1/2/9466f981baa05752767208fc93129eaf
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 32 (2010)
    Issue (Month): 4 (December)
    Pages: 993-1007

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    Handle: RePEc:eee:jmacro:v:32:y:2010:i:4:p:993-1007

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    Web page: http://www.elsevier.com/locate/inca/622617

    Related research

    Keywords: Core inflation Forecasting;

    References

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    1. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient Inflation Estimation," NBER Working Papers 6183, National Bureau of Economic Research, Inc.
    2. Bilke, Laurent & Stracca, Livio, 2007. "A persistence-weighted measure of core inflation in the Euro area," Economic Modelling, Elsevier, vol. 24(6), pages 1032-1047, November.
    3. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
    4. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
    5. Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
    6. Robert Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 19-38.
    7. C. John McDermott & Alasdair Scott, 2000. "Concordance in Business Cycles," IMF Working Papers 00/37, International Monetary Fund.
    8. Danny Quah & Shaun Vahey, 1995. "Measuring Core Inflation," Bank of England working papers 31, Bank of England.
    9. Cogley, Timothy, 2002. "A Simple Adaptive Measure of Core Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 94-113, February.
    10. Landau, Bettina, 2000. "Core inflation rates: a comparison of methods based on west German data," Discussion Paper Series 1: Economic Studies 2000,04, Deutsche Bundesbank, Research Centre.
    11. Smith, Julie K, 2004. "Weighted Median Inflation: Is This Core Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 253-63, April.
    12. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
    13. Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Papers 9903, Federal Reserve Bank of Dallas.
    14. Todd E. Clark, 2001. "Comparing measures of core inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-31.
    15. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
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    Cited by:
    1. Mazumder, Sandeep, 2014. "The sacrifice ratio and core inflation," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 400-421.

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