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A statistical measure of core inflation

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  • Meyler, Aidan

Abstract

This paper examines alternative statistically-based measures of core inflation in Ireland over the period 1976-1999. A highly disaggregated (approximately 500 price series) dataset from the Irish HICP is used. The distribution of quarterly price changes is shown, in common with other international studies, to be highly kurtotic (i.e., fat-tailed) and right skewed. This would suggest there is considerable ‘statistical noise’ in the measured inflation rate, motivating the use of ‘limited influence’ estimators of central tendency over the mean measure on the grounds of statistical efficiency. It is found that even a relatively small amount of trim from both ends of the distribution of price changes results in considerable improvement in root mean square error (RMSE) relative to a benchmark measure of core inflation. This improvement is even larger when monthly data are examined.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11362.

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Date of creation: Apr 1999
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Publication status: Published in Central Bank and Financial Services Authority of Ireland Technical Paper Series 2/RT/1999.1999(1999): pp. 1-43
Handle: RePEc:pra:mprapa:11362

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Keywords: core inflation; trimmed mean; Ireland;

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References

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  1. Michael F. Bryan & Stephen G. Cecchetti, 1999. "Inflation And The Distribution Of Price Changes," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 188-196, May.
  2. Thérèse Laflèche, 1997. "Statistical measures of the trend rate of inflation," Bank of Canada Review, Bank of Canada, Bank of Canada, vol. 1997(Autumn), pages 29-47.
  3. Ball, L. & Mankiw, G.H., 1992. "Relative-Price Change as Aggregate Supply Shocks," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1609, Harvard - Institute of Economic Research.
  4. Danny Quah & Danny Quah & Shaun P. Vahey, 1995. "Measuring Core Inflation," CEP Discussion Papers dp0254, Centre for Economic Performance, LSE.
  5. Christine Gartner & Gert Wehinger, 1998. "Core Inflation in Selected European Union Countries," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 33, Oesterreichische Nationalbank (Austrian Central Bank).
  6. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient Inflation Estimation," NBER Working Papers 6183, National Bureau of Economic Research, Inc.
  7. Quah, Danny, 1995. "Measuring Core Inflation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1153, C.E.P.R. Discussion Papers.
  8. Stephen G. Cecchetti, 1996. "Measuring Short-Run Inflation for Central Bankers," NBER Working Papers 5786, National Bureau of Economic Research, Inc.
  9. Nathan S. Balke & Mark A. Wynne, 1996. "Supply shocks and the distribution of price changes," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, Federal Reserve Bank of Dallas, issue Q I, pages 10-18.
  10. Mark A. Wynne, 1997. "Measuring short-run inflation for central bankers - commentary," Review, Federal Reserve Bank of St. Louis, issue May, pages 161-167.
  11. Clements, Kenneth W & Izan, H Y, 1987. "The Measurement of Inflation: A Stochastic Approach," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 5(3), pages 339-50, July.
  12. Meyler, Aidan & Kenny, Geoff & Quinn, Terry, 1998. "Forecasting irish inflation using ARIMA models," MPRA Paper 11359, University Library of Munich, Germany.
  13. Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers, Reserve Bank of Australia rdp9810, Reserve Bank of Australia.
  14. Bryan, Michael-F & Cecchetti, Stephen-G, 1999. "The Monthly Measurement of Core Inflation in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(1), pages 77-101, May.
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Cited by:
  1. Vega, Juan Luis & Wynne, Mark A., 2001. "An evaluation of some measures of core inflation for the euro area," Working Paper Series, European Central Bank 0053, European Central Bank.
  2. Colin Bermingham, 2007. "How Useful is Core Inflation for Forecasting Headline Inflation?," The Economic and Social Review, Economic and Social Studies, Economic and Social Studies, vol. 38(3), pages 355–377.
  3. Luc Aucremanne & Guy Brys & Peter J Rousseeuw & Anja Struyf & Mia Hubert, 2003. "Inflation, relative prices and nominal rigidities," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 81-105 Bank for International Settlements.
  4. L. Aucremanne, 2001. "The use of Robust Estimators as Measures of Core Inflation," DNB Staff Reports (discontinued), Netherlands Central Bank 61, Netherlands Central Bank.
  5. Juan-Luis Vega & Mark A. Wynne, 2002. "A first assessment of some measures of core inflation for the euro area," Working Papers, Federal Reserve Bank of Dallas 0205, Federal Reserve Bank of Dallas.
  6. Bermingham, Colin, 2006. "How Useful is Core Inflation for Forecasting Headline Inflation?," Research Technical Papers 11/RT/06, Central Bank of Ireland.
  7. Gagik G. Aghajanyan, 2005. "Core inflation in a small transition country: choice of optimal measures," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 2(1), pages 83-110, June.

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