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Implications of rounding and rebasing for empirical analysis using consumer price inflation

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Sharon Kozicki
Barak Hoffman

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Abstract

Monthly CPI inflation rates can be spuriously choppy when constructed using the official CPI, rebased with 1982-84=100. The problem can be traced to rounding that occurs when only one digit after the decimal place is reported in rebased CPI data. This paper compares three CPI measures to illustrate how rounding and rebasing introduce distortions that affect variance properties, alter lag specification in autoregressive models, and "flip" results of unit root tests. To reduce distortions, the paper recommends using either original release data or the CPI rebased with 1967=100.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number 99-08.

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Date of creation: 1999
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Handle: RePEc:fip:fedkrw:99-08

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Keywords: Inflation (Finance) Consumer price indexes

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  2. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January. [Downloadable!] (restricted)
  3. Katsimbris, George M, 1985. "The Relationship between the Inflation Rate, Its Variability, and Output Growth Variability: Disaggregated International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(2), pages 179-88, May. [Downloadable!] (restricted)
  4. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June. [Downloadable!] (restricted)
  5. Froyen, Richard T & Waud, Roger N, 1987. "An Examination of Aggregate Price Uncertainty in Four Countries and Some Implications for Real Output," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 353-72, June. [Downloadable!] (restricted)
  6. King, Robert G. & Watson, Mark W., 1994. "The post-war U.S. phillips curve: a revisionist econometric history," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 157-219, December. [Downloadable!] (restricted)
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  7. John E. Golob, 1994. "Does inflation uncertainty increase with inflation?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 27-38. [Downloadable!]
  8. A. Steven Holland, 1984. "Does higher inflation lead to more uncertain inflation?," Review, Federal Reserve Bank of St. Louis, issue Feb, pages 15-26. [Downloadable!]
  9. Richard T. Froyen & Roger N. Waud, 1987. "An Examination of Aggregate Price Uncertainty in Four Countries and SomeImplications for Real Output," NBER Working Papers 1460, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Evans, Martin, 1991. "Discovering the Link between Inflation Rates and Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 169-84, May. [Downloadable!] (restricted)
  11. Taylor, John B., 1981. "On the relation between the variability of inflation and the average inflation rate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 57-85, January. [Downloadable!] (restricted)
  12. Kim, Chang-Jin, 1993. "Unobserved-Component Time Series Models with Markov-Switching Heteroscedasticity: Changes in Regime and the Link between Inflation Rates and Inflation Uncertainty," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 341-49, July.
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  14. Martin Evans & Paul Wachtel, 1993. "Inflation regimes and the sources of inflation uncertainty," Proceedings, Federal Reserve Bank of Cleveland, pages 475-520.
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