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Using the First Principal Component as a Core Inflation Indicator

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  • José Ferreira Machado
  • Carlos Robalo Marques
  • Pedro Duarte Neves
  • Afonso Gonçalves da Silva

Abstract

This paper investigates the consequences of non-stationarity for the principal components analysis and suggests a data transformation that allows obtaining smoother series for the first principal component to be used as a core inflation indicator. The paper also introduces a theoretical model, which allows interpreting core inflation as a common stochastic trend to the year-on-year rates of change of the price indices of the basic CPI items. Finally, it is shown that the first principal component computed in real time meets the evaluation criteria introduced in Marques et al. (2000).

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File URL: http://www.bportugal.pt/en-US/BdP%20Publications%20Research/WP200109.pdf
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Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200109.

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Date of creation: 2001
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Handle: RePEc:ptu:wpaper:w200109

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Cited by:
  1. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among them," IMF Working Papers 06/97, International Monetary Fund.
  2. Fröhling, Annette & Lommatzsch, Kirsten, 2011. "Output sensitivity of inflation in the euro area: Indirect evidence from disaggregated consumer prices," Discussion Paper Series 1: Economic Studies 2011,25, Deutsche Bundesbank, Research Centre.

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