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U.S. Core Inflation: A Wavelet Analysis

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  • kevin dowd
  • john cotter

Abstract

This paper proposes the use of wavelet methods to estimate U.S. core inflation. It explains wavelet methods and suggests they are ideally suited to this task. Comparisons are made with traditional CPI-based and regression-based measures for their performance in following trend inflation and predicting future inflation. Results suggest that wavelet-based measures perform better, and sometimes much better, than the traditional approaches. These results suggest that wavelet methods are a promising avenue for future research on core inflation.

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File URL: http://arxiv.org/pdf/1103.5659
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Paper provided by arXiv.org in its series Papers with number 1103.5659.

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Date of creation: Mar 2011
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Handle: RePEc:arx:papers:1103.5659

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  1. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The Consumer Price Index as a Measure of Inflation," NBER Working Papers 4505, National Bureau of Economic Research, Inc.
  2. Wynne, Mark A., 1999. "Core inflation: a review of some conceptual issues," Working Paper Series 0005, European Central Bank.
  3. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
  4. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-44, September.
  5. Julie K. Smith, 2012. "PCE inflation and core inflation," Working Papers 1203, Federal Reserve Bank of Dallas.
  6. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
  7. 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.
  8. 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.
  9. Ramsey, James B. & Lampart, Camille, 1998. "Decomposition Of Economic Relationships By Timescale Using Wavelets," Macroeconomic Dynamics, Cambridge University Press, vol. 2(01), pages 49-71, March.
  10. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
  11. Max Stevenson, 2001. "Filtering and Forecasting Spot Electricity Prices in the Increasingly Deregulated Australian Electricity Market," Research Paper Series 63, Quantitative Finance Research Centre, University of Technology, Sydney.
  12. Jensen, Mark J, 1999. "Using wavelets to obtain a consistent ordinary least squares estimator of the long-memory parameter," MPRA Paper 39152, University Library of Munich, Germany.
  13. Robalo Marques, Carlos & Duarte Neves, Pedro & Morais Sarmento, Luis, 2003. "Evaluating core inflation indicators," Economic Modelling, Elsevier, vol. 20(4), pages 765-775, July.
  14. 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.
  15. Robert Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
  16. 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.
  17. Todd E. Clark, 2001. "Comparing measures of core inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-31.
  18. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand.
  19. Ramsey, James B. & Zhang, Zhifeng, 1997. "The analysis of foreign exchange data using waveform dictionaries," Journal of Empirical Finance, Elsevier, vol. 4(4), pages 341-372, December.
  20. Christoph Schleicher, 2002. "An Introduction to Wavelets for Economists," Working Papers 02-3, Bank of Canada.
  21. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient Inflation Estimation," NBER Working Papers 6183, National Bureau of Economic Research, Inc.
  22. Hogan, Seamus & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
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Cited by:
  1. Lahura, Erick & Vega, Marco, 2011. "Wavelet-based Core Inflation Measures: Evidence from Peru," Working Papers 2011-019, Banco Central de Reserva del Perú.
  2. Erick Lahura & Marco Vega, 2011. "Evaluation of Wavelet-based Core Inflation Measures: Evidence from Peru," Documentos de Trabajo 2011-320, Departamento de Economía - Pontificia Universidad Católica del Perú.
  3. Baqaee, David, 2010. "Using wavelets to measure core inflation: The case of New Zealand," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 241-255, December.
  4. Andersson, Fredrik N. G., 2008. "Core Inflation - Why the Federal Reserve Got it Wrong," Working Papers 2008:19, Lund University, Department of Economics.

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