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The use of Robust Estimators as Measures of Core Inflation

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  • L. Aucremanne
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    Abstract

    This paper examines robust estimators of core inflation for Belgian historical CPI data, and for euro area Harmonised Indices of Consumer Prices. Evidence of fat tails in the cross-sections of price changes is provided by traditional measures, as well as by a robust measure of the tail weights that is not vulnerable to the masking phenomenon. Trimmed means are considered in the first instance. We introduce a new estimator where the optimal trimming percentage is the lowest percentage for which the hypothesis of normality of the trimmed samples cannot be rejected on the basis of the Jarque-Bera statistic. Two variants are considered one with a constant and one with a time-varying optimal trimming percentage. The latter has a higher breakdown point. Symmetric and asymmetric trimming are considered as well. Another robust estimator, the one-step Huber-type skipped mean, which is less vulnerable to the masking phenomenon, is also examined. It is shown that the robust estimators outperform the traditional core inflation measures found in the literature. However, as traditional measures, they lag rather than lead observed inflation. This was particularly so in the 70s and the 80s when the oil price shocks had substantial second-round effects on Belgian inflation.

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    File URL: http://www.dnb.nl/binaries/sr061_tcm46-146838.pdf
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    Bibliographic Info

    Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 61.

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    Length: 66 pages
    Date of creation: 2001
    Date of revision:
    Handle: RePEc:dnb:staffs:61

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    Related research

    Keywords: Inflation; Core inflation; Relative prices; Robust estimators of central tendency;

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    References

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    1. Nathan S. Balke & Mark A. Wynne, 1996. "An equilibrium analysis of relative price changes and aggregate inflation," Working Papers 9609, Federal Reserve Bank of Dallas.
    2. 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.
    3. Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Papers 9903, Federal Reserve Bank of Dallas.
    4. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
    5. Ball, Laurence & Mankiw, N. Gregory, 1999. "Interpreting the Correlation Between Inflation and the Skewness of Relative Prices: A Comment on Bryan and Cecchetti," Scholarly Articles 3415439, Harvard University Department of Economics.
    6. Michael F. Bryan & Stephen G. Cecchetti, 1999. "Inflation And The Distribution Of Price Changes," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 188-196, May.
    7. Carlos Robalo Marques & João Machado Mota, 2000. "Using the asymmetric trimmed mean as a core inflation indicator," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    8. Pedro Duarte Neves & Luís Morais Sarmento & Carlos Robalo Marques, 1999. "Evaluating core inflation indicators," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    9. Laurence Ball & N. Gregory Mankiw, 1992. "Asymmetric Price Adjustment and Economic Fluctuations," NBER Working Papers 4089, National Bureau of Economic Research, Inc.
    10. Meyler, Aidan, 1999. "A statistical measure of core inflation," MPRA Paper 11362, University Library of Munich, Germany.
    11. Bryan, Michael-F & Cecchetti, Stephen-G, 1999. "The Monthly Measurement of Core Inflation in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(1), pages 77-101, May.
    12. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
    13. Oosterhoff, J., 1994. "Trimmed mean or sample median?," Statistics & Probability Letters, Elsevier, vol. 20(5), pages 401-409, August.
    14. Ball, Laurence & Mankiw, N Gregory, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 161-93, February.
    15. Laurence Ball & N. Gregory Mankiw, 1999. "Interpreting The Correlation Between Inflation And The Skewness Of Relative Prices: A Comment On Bryan And," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 197-198, May.
    16. Aucremanne, L., 2000. "The Use of Robust Estimators as Measures of Core Inflation," Papers 2, Warwick - Development Economics Research Centre.
    17. Thérèse Laflèche, 1997. "Statistical measures of the trend rate of inflation," Bank of Canada Review, Bank of Canada, vol. 1997(Autumn), pages 29-47.
    18. Franck Sédillot & Hervé Le Bihan, 2002. "Implementing and interpreting indicators of core inflation: the case of France," Empirical Economics, Springer, vol. 27(3), pages 473-497.
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