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Underlying Inflation in Australia: Are the Existing Measures Satisfactory?

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  • Robert Dixon
  • Guay Lim

Abstract

Along with a number of other central banks around the world the Reserve Bank of Australia has quite explicitly adopted an inflation target. Both the Bank and the Australian Government’s statistical agency (the Australian Bureau of Statistics) report various measures of the underlying rate of inflation. The aim of this paper is to formulate criteria which an acceptable underlying rate must satisfy and then test to see whether either individually or in combination any of the current (CPI Excluding volatile items; CPI Market prices excluding volatile items; Weighted median and; Trimmed mean) or recently discarded (the Treasury underlying rate) measures of underlying inflation satisfy these criteria. We find that for the period since inflation targeting began (in 1993) none of these underlying series satisfy all of the criteria we propose but that one series (the RBA’s Trimmed mean series) does satisfy the sub-set which we refer to as our ‘necessary criteria’. We then examine the results of an ‘Unobserved Components’ decomposition and argue that it provides useful information on underlying inflation in Australia. JEL Codes E31, C4 Keywords:

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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 878.

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Length: 41 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:mlb:wpaper:878

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Keywords: Inflation Monetary Policy Time Series Econometrics;

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References

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  1. Cogley, Timothy, 2002. "A Simple Adaptive Measure of Core Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 94-113, February.
  2. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
  3. James Morley & Charles Nelson & Eric Zivot, 2002. "Why Are Beveridge-Nelson and Unobserved-Component Decompositions of GDP So Different?," Working Papers UWEC-2002-01, University of Washington, Department of Economics.
  4. Pedro Duarte Neves & Luís Morais Sarmento & Carlos Robalo Marques, 1999. "Evaluating core inflation indicators," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  5. Guy Debelle, 1997. "Inflation Targeting in Practice," IMF Working Papers 97/35, International Monetary Fund.
  6. Carlos Robalo Marques & Pedro Duarte Neves & Afonso Gonçalves da Silva, 2000. "Why Should Central Banks Avoid the Use of the Underlying Inflation Indicator?," Working Papers w200005, Banco de Portugal, Economics and Research Department.
  7. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
  8. Morley, James C., 2002. "A state-space approach to calculating the Beveridge-Nelson decomposition," Economics Letters, Elsevier, vol. 75(1), pages 123-127, March.
  9. James C. Morley & Charles R. Nelson & Eric Zivot, 2003. "Why Are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP So Different?," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 235-243, May.
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Cited by:
  1. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia.
  2. Robert Dixon & David Shepherd, 2006. "The Cyclical Dynamics and Volatility of Australian Output and Employment," Department of Economics - Working Papers Series 968, The University of Melbourne.
  3. Rachel Holden, 2006. "Measuring core inflation," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 7p, December.
  4. Lei Lei Song, 2003. "The Role of the Unit of Analysis in Tax Policy Reform Evaluations," Melbourne Institute Working Paper Series wp2003n29, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  5. Lei Lei Song, 2005. "Do underlying measures of inflation outperform headline rates? Evidence from Australian data," Applied Economics, Taylor & Francis Journals, vol. 37(3), pages 339-345.
  6. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Working Papers 06-10, Bank of Canada.

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