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Measurement bias in the HICP: what do we know and what do we need to know?

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Mark A. Wynne
Diego Rodriguez-Palenzuela

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Abstract

The Harmonized Index of Consumer Prices (HICP) is the primary measure of inflation in the euro area, and plays a central role in the policy deliberations of the European Central Bank (ECB). The ECB defines its Treaty mandate of price stability as "…a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2 percent […] to be maintained over the medium term." Among the rationales given for defining price stability as prevailing at some positive measured inflation rate is the possibility that the HICP as published incorporates measurement errors of one sort or another that may cause it to systematically overstate the true rate of inflation in the euro area. This paper reviews what currently is known about the scope of measurement error in the HICP. We conclude that given the vague conceptual framework of the HICP, the scant research on price measurement issues in the EU and the ongoing improvements in the HICP, there is very little scientific basis at this time for a point (or even an interval) estimate of a positive bias in the HICP.

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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 02 06.

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Date of creation: 2002
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Handle: RePEc:fip:feddwp:0206

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Keywords: Euro ; European Central Bank ; Prices;

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  2. Lutz Kilian & Atsushi Inoue, 2003. "On the selection of forecasting models," Working Paper Series 214, European Central Bank. [Downloadable!]
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  3. Cornelia Holthausen & Jean-Charles Rochet, 2002. "Efficient pricing of large value interbank payment systems," Working Paper Series 184, European Central Bank. [Downloadable!]
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  4. Karsten Staehr, 2008. "The Maastricht Inflation Criterion and the New EU Members from Central and Eastern Europe," Bank of Estonia Working Papers 2008-04, Bank of Estonia, revised 30 Oct 2008. [Downloadable!]
  5. Carsten Detken & Alistair Dieppe & Jerome Henry & Frank Smets & Carmen Marin, 2002. "Model uncertainty and the equilibrium value of the real effective euro exchange rate," Working Paper Series 160, European Central Bank. [Downloadable!]
  6. Henning Ahnert & Geoff Kenny, 2004. "Quality adjustment of European price statistics and the role for hedonics," Occasional Paper Series 15, European Central Bank. [Downloadable!]
  7. Mark A. Wynne, 2008. "How should central banks define price stability?," Globalization and Monetary Policy Institute Working Paper 08, Federal Reserve Bank of Dallas. [Downloadable!]
  8. Giancarlo Corsetti & Luca Dedola, 2002. "From the ERM to the Euro: new evidence on economic and policy convergence among EU countries," Working Paper Series 176, European Central Bank. [Downloadable!]
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