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Using wavelets to measure core inflation: the case in New Zealand

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This paper uses wavelets to develop a core inflation measure for inflation targeting central banks. The analysis is applied to the case of New Zealand – the country with the longest history of explicit inflation targeting. We compare the performance of our proposed measure against some popular alternatives. Our measure does well at identifying a reliable medium-term trend in inflation. It also has comparable forecasting performance to standard benchmarks.

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File URL: http://rbnz.govt.nz/research_and_publications/discussion_papers/2009/dp09_05.pdf
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Bibliographic Info

Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2009/05.

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Length: 23p
Date of creation: May 2009
Date of revision:
Handle: RePEc:nzb:nzbdps:2009/05

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  1. Marques, Carlos Robalo & Neves, Pedro Duarte & da Silva, Afonso Goncalves, 2002. "Why should Central Banks avoid the use of the underlying inflation indicator?," Economics Letters, Elsevier, vol. 75(1), pages 17-23, March.
  2. Thérèse Laflèche, 1997. "Statistical measures of the trend rate of inflation," Bank of Canada Review, Bank of Canada, vol. 1997(Autumn), pages 29-47.
  3. Domenico Giannone & Troy Matheson, 2007. "A new core inflation indicator for New Zealand," ULB Institutional Repository 2013/6407, ULB -- Universite Libre de Bruxelles.
  4. Cotter, John & Dowd, Kevin, 2006. "U.S. Core Inflation: A Wavelet Analysis," MPRA Paper 3520, University Library of Munich, Germany.
  5. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
  6. Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Papers 9903, Federal Reserve Bank of Dallas.
  7. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient inflation estimation," Working Paper 9707, Federal Reserve Bank of Cleveland.
  8. Ramsey James B., 2002. "Wavelets in Economics and Finance: Past and Future," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(3), pages 1-29, November.
  9. Stuart Barber & Guy P. Nason, 2004. "Real nonparametric regression using complex wavelets," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 66(4), pages 927-939.
  10. Mick Silver, 2007. "Core Inflation: Measurement and Statistical Issues in Choosing Among Alternative Measures," IMF Staff Papers, Palgrave Macmillan, vol. 54(1), pages 163-190, May.
  11. Christoph Schleicher, 2002. "An Introduction to Wavelets for Economists," Working Papers 02-3, Bank of Canada.
  12. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Working Papers 06-10, Bank of Canada.
  13. 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.
  14. Robert Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
  15. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand.
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Cited by:
  1. Erick Lahura & Marco Vega, 2011. "Evaluation of Wavelet-based Core Inflation Measures: Evidence from Peru," Documentos de Trabajo 2011-320, Departamento de Economía - Pontificia Universidad Católica del Perú.
  2. Lahura, Erick & Vega, Marco, 2011. "Wavelet-based Core Inflation Measures: Evidence from Peru," Working Papers 2011-019, Banco Central de Reserva del Perú.
  3. Armas, Adrián & Vallejos , Lucy & Vega, Marco, 2011. "Indicadores tendenciales de inflación y su relevancia como variables indicativas de política monetaria," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 20, pages 27-56.

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