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Measuring core inflation in the Euro area

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Author Info
Claudio Morana () (University of Piemonte Orientale, Via Perrone 18, I-28100 Novara, Italy.)
Abstract

We propose a measure of core inflation which is derived from a Markov switching ARFIMA model. The Markov switching ARFIMA model generalises the standard ARFIMA model allowing mean reversion to take place with respect to a changing unconditional mean. By imposing a coswitching restriction for nominal money growth and HICP inflation we are able to identify three regimes and extablish a linkage between the long-run dynamics of inflation and money growth. The last regime has been found to be coherent with the objective of price stability and can be tentatively named EMU regime. The core inflation model has been contrasted with other models suggested in the literature and found to be superior in terms of forecasting power. JEL Classification: C22; E31; E52.

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Paper provided by European Central Bank in its series Working Paper Series with number 36.

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Length: 59 pages
Date of creation: Nov 2000
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Handle: RePEc:ecb:ecbwps:20000036

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Keywords: ARFIMA core inflation euro area Markov switching.

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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.:
  1. Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Paper Series 5, European Central Bank. [Downloadable!]
    Other versions:
  2. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September. [Downloadable!] (restricted)
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  5. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De. [Downloadable!] (restricted)
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  7. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July. [Downloadable!] (restricted)
  11. Claus Brand & Nuno Cassola, 2000. "A money demand system for Euro area M3," Working Paper Series 39, European Central Bank. [Downloadable!]
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  13. D Quah & S Vahey, 1995. "Measuring Core Inflation," CEP Discussion Papers 0254, Centre for Economic Performance, LSE.
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  14. Warne, A., 1993. "A Common Trends Model: Identification, Estimation and Inference," Papers 555, Stockholm - International Economic Studies.
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  19. Mellander, Erik & Vredin, A & Warne, A, 1992. "Stochastic Trends and Economic Fluctuations in a Small Open Economy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(4), pages 369-94, Oct.-Dec.. [Downloadable!] (restricted)
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    Other versions:
  27. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
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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.)

  1. K. Hubrich, 2001. "Forecasting euro area inflation: Does contemponaneous aggregration improve the forecasting performance," WO Research Memoranda (discontinued) 661, Netherlands Central Bank, Research Department. [Downloadable!]
  2. Rapacciuolo, Ciro, 2003. "A simple model for the short term forecasting of Italian inflation," MPRA Paper 7714, University Library of Munich, Germany. [Downloadable!]
  3. Claudio Morana, 2002. "Common Persistent Factors in Inflation and Excess Nominal Money Growth and a New Measure of Core Inflation," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 6(3), pages 1092-1092. [Downloadable!] (restricted)
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