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The Role of the Unit of Analysis in Tax Policy Reform Evaluations

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  • Lei Lei Song

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

Abstract

Many central banks often focus on underlying measures of inflation when assessing inflation trends. This paper compares the accuracy of underlying measures of inflation relative to the headline rates by using Australian data. It is found that the underlying measures did have smaller errors in predicting the long-term trend in inflation than the quarterly headline rate in the sample period 1977—2001 and the inflation targeting subperiod starting from 1993, due to the large volatility of the headline rate. As compared to the year-ended headline rate, the statistical test results , however, support only the measure of market prices excluding volatile items, not the others. There is some weak evidence of the weighted median measure outperforming the headline rate in the subperiod after 1993. With respect to directional accuracy, the test statistics cannot reject the null hypothesis of an equal probability correctly predicting the moving direction of the inflation trend, though the headline rates have a higher probability.

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Bibliographic Info

Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2003n29.

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Length: 15 pages
Date of creation: Dec 2003
Date of revision:
Handle: RePEc:iae:iaewps:wp2003n29

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Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
Phone: +61 3 8344 2100
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Web page: http://www.melbourneinstitute.com/
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  1. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The Consumer Price Index as a Measure of Inflation," NBER Working Papers 4505, National Bureau of Economic Research, Inc.
  2. Danny Quah & Shaun Vahey, 1995. "Measuring Core Inflation," Bank of England working papers 31, Bank of England.
  3. Stephen G. Cecchetti & Erica L. Groshen, 2000. "Understanding Inflation: Implications for Monetary Policy," NBER Working Papers 7482, National Bureau of Economic Research, Inc.
  4. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
  5. Le Bihan, Herve & Sedillot, Franck, 2000. "Do core inflation measures help forecast inflation?: Out-of-sample evidence from French data," Economics Letters, Elsevier, vol. 69(3), pages 261-266, December.
  6. Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Papers 9903, Federal Reserve Bank of Dallas.
  7. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
  8. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
  9. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  10. Robert Dixon & G.C. Lim, 2004. "Underlying Inflation in Australia: Are the Existing Measures Satisfactory?," The Economic Record, The Economic Society of Australia, vol. 80(251), pages 373-386, December.
  11. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
  12. Boskin, Michael J, et al, 1997. "The CPI Commission: Findings and Recommendations," American Economic Review, American Economic Association, vol. 87(2), pages 78-83, May.
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Cited by:
  1. Rosanna Scutella, 2004. "Moves to a Basic Income-Flat Tax System in Australia: Implications for the Distribution of Income and Supply of Labour," Melbourne Institute Working Paper Series wp2004n05, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.

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