A monetary authority with the primary objective of price stability has to distinguish between temporary price shocks and persistent shocks to the rate of inflation. A measure of underlying inflation, therefore, has an important role to play as a guideline for monetary policy. In this paper, a measure of underlying inflation in the United States is obtained using a structural vector autoregressive (SVAR) methodology. The assumption that movements in measured inflation are the result of (a) one-time shocks to prices arising from supply-side developments and (b) persistent shocks to the inflation rate arising from demand-side developments provides a set of long-run restrictions to identify the structural innovations to the consumer price inflation rate. The model is estimated with monthly data and includes consumer prices (CPI), capacity utilization (CAPUT), producer prices of finished consumer goods (PPI), and import prices (IMP). The evidence reported in this paper suggests that measured inflation in the United States was below its underlying trend rate in 1994 and 1995, a period when inflationary pressures remained subdued, despite above-potential growth and labour market tightness. The evidence also supports the view that temporary factors have helped to contain inflationary tendencies in recent years. Past shocks should exert some further downward pressure on the inflation rate. Moreover, we find that the tightening in 199495 coincided with an upward trend in the underlying inflation rate, while measured inflation was still trending downward. The finding supports the view that the Federal Reserve reacts to movements in the underlying trend inflation rate.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Bank of Canada in its series Working Papers with number
97-20.
Find related papers by JEL classification: E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Michael F. Bryan & Stephen G. Cecchetti, 1993.
"Measuring Core Inflation,"
NBER Working Papers
4303, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Michael F. Bryan & Stephen G. Cecchetti, 1994.
"Measuring Core Inflation,"
NBER Chapters,
in: Monetary Policy, pages 195-219
National Bureau of Economic Research, Inc.
[Downloadable!]
Matthew Shapiro & Mark Watson, 1988.
"Sources of Business Cycles Fluctuations,"
NBER Chapters,
in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156
National Bureau of Economic Research, Inc.
[Downloadable!]
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)