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Real time underlying inflation gauges for monetary policymakers

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Author Info

  • Marlene Amstad
  • Simon Potter

Abstract

Central banks analyze a wide range of data to obtain better measures of underlying inflationary pressures. Factor models have widely been used to formalize this procedure. Using a dynamic factor model this paper develops a measure of underlying inflation (UIG) at time horizons of relevance for monetary policymakers for both CPI and PCE. The UIG uses a broad data set allowing for high-frequency updates on underlying inflation. The paper complements the existing literature on U.S. "core" measures by illustrating how UIG is used and interpreted in real time since late 2005.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 420.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:420

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Related research

Keywords: Inflation (Finance) ; Economic indicators ; Economic forecasting ; Monetary policy ; Banks and banking; Central;

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References

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  1. Amstad, Marlene & Fischer, Andreas M, 2005. "Time-Varying Pass-Through from Import Prices to Consumer Prices: Evidence from an Event Study with Real-Time Data," CEPR Discussion Papers 5395, C.E.P.R. Discussion Papers.
  2. Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005. "Monetary Policy in Real Time," Working Papers 284, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005. "Monetary Policy in Real Time," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 161-224 National Bureau of Economic Research, Inc.
  3. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 525-546, April.
  4. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient Inflation Estimation," NBER Working Papers 6183, National Bureau of Economic Research, Inc.
  5. Gordon, Robert J, 1982. "Price Inertia and Policy Ineffectiveness in the United States, 1890-1980," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1087-1117, December.
  6. Riccardo Cristadoro & Mario Forni & Lucrezia Reichlin & Giovanni Veronese, 2001. "A core inflation index for the euro area," Temi di discussione (Economic working papers) 435, Bank of Italy, Economic Research and International Relations Area.
  7. Danny Quah & Shaun Vahey, 1995. "Measuring Core Inflation," Bank of England working papers 31, Bank of England.
  8. Hogan, Seamus & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
  9. Marlene Amstad & Andreas M. Fischer, 2009. "Are Weekly Inflation Forecasts Informative?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(2), pages 237-252, 04.
  10. Domenico Giannone & Troy D. Matheson, 2007. "A New Core Inflation Indicator for New Zealand," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 145-180, December.
  11. William T. Gavin & Kevin L. Kliesen, 2006. "Forecasting inflation and output: comparing data-rich models with simple rules," Working Papers 2006-054, Federal Reserve Bank of St. Louis.
  12. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
  13. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
  14. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
  15. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
  16. Michael F. Bryan & Stephen G. Cecchetti, 1996. "Inflation and the Distribution of Price Changes," NBER Working Papers 5793, National Bureau of Economic Research, Inc.
  17. Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September.
  18. E. T. McPHEE., 1928. "Notes," The Economic Record, The Economic Society of Australia, vol. 4(1), pages 92-95, 05.
  19. Boivin, Jean & Ng, Serena, 2006. "Are more data always better for factor analysis?," Journal of Econometrics, Elsevier, vol. 132(1), pages 169-194, May.
  20. Efrem Castelnuovo & Sergio Nicoletti-Altimari & Diego Rodriguez-Palenzuela, 2003. "Definition of price stability, range and point inflation targets - the anchoring of long-term inflation expectations," Working Paper Series 273, European Central Bank.
  21. Jim Dolmas, 2005. "Trimmed mean PCE inflation," Working Papers 05-06, Federal Reserve Bank of Dallas.
  22. Timothy Cogley, 1998. "A simple adaptive measure of core inflation," Working Papers in Applied Economic Theory and Econometrics 98-06, Federal Reserve Bank of San Francisco.
  23. Marlene Amstad & Andreas M. Fischer, 2009. "Do macroeconomic announcements move inflation forecasts?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 507-518.
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Citations

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Cited by:
  1. Theodore M. Crone & N. Neil K. Khettry & Loretta J. Mester & Jason A. Novak, 2008. "Core measures of inflation as predictors of total inflation," Working Papers 08-9, Federal Reserve Bank of Philadelphia.
  2. Ricardo Reis & Mark W. Watson, 2007. "Measuring changes in the value of the numeraire," Kiel Working Papers 1364, Kiel Institute for the World Economy.
  3. Alberto Humala & Gabriel Rodríguez, 2011. "A Factorial Decomposition Of Inflation In Peru, An Alternative Measure Of Core Inflation," Documentos de Trabajo 2011-315, Departamento de Economía - Pontificia Universidad Católica del Perú.
  4. Domenico Giannone & Troy Matheson, 2006. "A new core inflation indicator for New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2006/02, Reserve Bank of New Zealand.
  5. Michal Brzoza-Brzezina & Jacek Kotlowski, 2009. "Estimating pure inflation in the Polish economy," Working Papers 37, Department of Applied Econometrics, Warsaw School of Economics.

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