IDEAS home Printed from https://ideas.repec.org/p/pcp/pucwps/wp00320.html
   My bibliography  Save this paper

Evaluation of Wavelet-based Core Inflation Measures: Evidence from Peru

Author

Listed:
  • Erick Lahura

    (Departamento de Economía - Pontificia Universidad Católica del Perú
    Banco Central de la Reserva del Perú)

  • Marco Vega

    (Departamento de Economía - Pontificia Universidad Católica del Perú
    Banco Central de la Reserva del Perú)

Abstract

Under inflation targeting and other related monetary policy regimes, the identication of non-transitory inflation and forecasts about future inflation constitute key ingredients for monetary policy decisions. In practice, central banks perform these tasks using so-called "core inflation measures". In this paper we construct alternative core inflation measures using wavelet functions and multiresolution analysis (MRA), and then evaluate their relevance for monetary policy. The construction of wavelet-based core inflation measures (WIMs) is relatively new in the literature and their assessment has not been addressed formally, this paper being the first attempt to perform both tasks for the case of Peru. Another main contribution of this paper is that it proposes two alternative criteria for evaluating core inflation measures: (i) a VAR-based long-run criterion, and (ii) forecast-based criteria. Evidence from Peru shows that WIMs are superior in terms of long-run performance, and that they could improve short-term (up-to-6-months) inflation forecasts.

Suggested Citation

  • Erick Lahura & Marco Vega, 2011. "Evaluation of Wavelet-based Core Inflation Measures: Evidence from Peru," Documentos de Trabajo / Working Papers 2011-320, Departamento de Economía - Pontificia Universidad Católica del Perú.
    • Handle: RePEc:pcp:pucwps:wp00320
    as

    Download full text from publisher

    File URL: http://files.pucp.edu.pe/departamento/economia/DDD320.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    3. Christoph Schleicher, 2002. "An Introduction to Wavelets for Economists," Staff Working Papers 02-3, Bank of Canada.
    4. Dowd, Kevin & Cotter, John & Loh, Lixia, 2011. "U.S. Core Inflation: A Wavelet Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 15(4), pages 513-536, September.
    5. Pesaran, M Hashem & Timmermann, Allan, 1992. "A Simple Nonparametric Test of Predictive Performance," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 561-565, October.
    6. Ribba, Antonio, 2003. "Permanent-transitory decompositions and traditional measures of core inflation," Economics Letters, Elsevier, vol. 81(1), pages 109-116, October.
    7. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    8. Baqaee, David, 2010. "Using wavelets to measure core inflation: The case of New Zealand," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 241-255, December.
    9. 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.
    10. 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.
    11. Lahura Serrano, Erick W., 2004. "La relación dinero-producto, brecha del producto e inflación subyacente: algunas aplicaciones de las funciones Wavelets," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 11.
    12. Smith, Julie K, 2004. "Weighted Median Inflation: Is This Core Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 253-263, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lahura, Erick & Vega, Marco, 2011. "Wavelet-based Core Inflation Measures: Evidence from Peru," Working Papers 2011-019, Banco Central de Reserva del Perú.
    2. Gideon Du Rand & Kevin Kotze & Stan Du Plessis, 2015. "Measuring Core Inflation in South Africa," Working Papers 503, Economic Research Southern Africa.
    3. Durai, S. Raja Sethu & Ramachandran, M., 2007. "Core inflation for India," Journal of Asian Economics, Elsevier, vol. 18(2), pages 365-383, April.
    4. Cortés Espada Josué Fernando & Sámano Daniel & Gutiérrez Villanueva Rubí, 2019. "Dynamics of Mexican Inflation: A Wavelet Analysis," Working Papers 2019-17, Banco de México.
    5. Bermingham, Colin, 2010. "A critical assessment of existing estimates of US core inflation," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 993-1007, December.
    6. Dowd, Kevin & Cotter, John & Loh, Lixia, 2011. "U.S. Core Inflation: A Wavelet Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 15(4), pages 513-536, September.
    7. Stan Plessis & Gideon Rand & Kevin Kotzé, 2015. "Measuring Core Inflation in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 83(4), pages 527-548, December.
    8. Camba-Mendez, Gonzalo & Rodriguez-Palenzuela, Diego, 2003. "Assessment criteria for output gap estimates," Economic Modelling, Elsevier, vol. 20(3), pages 529-562, May.
    9. Adrian Armas & Lucy Vallejos & Marco Vega, 2010. "Measurement of price indices used by the central bank of Peru," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy and the measurement of inflation: prices, wages and expectations, volume 49, pages 259-283, Bank for International Settlements.
    10. Brent Meyer & Guhan Venkatu, 2012. "Trimmed-mean inflation statistics: just hit the one in the middle," Working Papers (Old Series) 1217, Federal Reserve Bank of Cleveland.
    11. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Staff Working Papers 06-10, Bank of Canada.
    12. Baqaee, David, 2010. "Using wavelets to measure core inflation: The case of New Zealand," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 241-255, December.
    13. Riccardo Cristadoro & Giuseppe Saporito & Fabrizio Venditti, 2013. "Forecasting inflation and tracking monetary policy in the euro area: does national information help?," Empirical Economics, Springer, vol. 44(3), pages 1065-1086, June.
    14. Döhrn, Roland & Barabas, György & Gebhardt, Heinz & Middendorf, Torge & Schäfer, Günter & Zimmermann, Tobias, 2008. "Die wirtschaftliche Entwicklung im Inland: Konjunktur im Zwischentief," RWI Konjunkturberichte, RWI - Leibniz-Institut für Wirtschaftsforschung, vol. 59(1), pages 31-82.
    15. Marlene Amstad & Simon M. Potter & Robert W. Rich, 2017. "The New York Fed Staff Underlying Inflation Gauge (UIG)," Economic Policy Review, Federal Reserve Bank of New York, issue 23-2, pages 1-32.
    16. Brent Meyer & Saeed Zaman, 2019. "The usefulness of the median CPI in Bayesian VARs used for macroeconomic forecasting and policy," Empirical Economics, Springer, vol. 57(2), pages 603-630, August.
    17. George Kapetanios & Gonzalo Camba-Mendez, 2005. "Forecasting euro area inflation using dynamic factor measures of underlying inflation," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(7), pages 491-503.
    18. Robert W. Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, vol. 13(Dec), pages 19-38.
    19. Brent Meyer & Saeed Zaman, 2013. "It’s not just for inflation: The usefulness of the median CPI in BVAR forecasting," Working Papers (Old Series) 1303, Federal Reserve Bank of Cleveland.
    20. Bhatt, Vipul & Kishor, N. Kundan, 2015. "Are all movements in food and energy prices transitory? Evidence from India," Journal of Policy Modeling, Elsevier, vol. 37(1), pages 92-106.

    More about this item

    Keywords

    Core inflation; wavelets; forecast; structural VAR;
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pcp:pucwps:wp00320. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/depucpe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.