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Measuring Underlying Inflation Using Dynamic Model Averaging

Author

Listed:
  • Yuto Iwasaki

    (Bank of Japan)

  • Sohei Kaihatsu

    (Bank of Japan)

Abstract

This paper presents a new framework for measuring underlying inflation with multiple core indicators for Japan's consumer price index (CPI). Specifically, a combined core indicator is constructed by applying an econometric method based on dynamic model averaging as a weighted average of individual core indicators. The combined core indicator has time-varying combination weights reflecting changes in the predictive performance of each individual core indicator on a real time basis. Thus, the combined core indicator has the potential to adapt to changes in the nature and sources of price movements. Empirical evidence indicates that the combined core indicator firmly outperforms the individual core indicators over time. In addition, the combination weights for the exclusion-based indicators (e.g., the CPI excluding fresh food) tend to be high when aggregate shocks drive the overall inflation. In contrast, combination weights for the distribution-based indicators (e.g., trimmed mean) tend to be high when idiosyncratic shocks are dominant.

Suggested Citation

  • Yuto Iwasaki & Sohei Kaihatsu, 2016. "Measuring Underlying Inflation Using Dynamic Model Averaging," Bank of Japan Working Paper Series 16-E-8, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp16e08
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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2016/data/wp16e08.pdf
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    Cited by:

    1. Koji Takahashi, 2016. "TIPS: The Trend Inflation Projection System and Estimation Results," Bank of Japan Working Paper Series 16-E-18, Bank of Japan.
    2. Lei Lv & Zhixin Liu & Yingying Xu, 2019. "Technological progress, globalization and low-inflation: Evidence from the United States," PLOS ONE, Public Library of Science, vol. 14(4), pages 1-19, April.

    More about this item

    Keywords

    Consumer price; Core inflation measure; Dynamic model averaging;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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