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Wavelet-based Core Inflation Measures: Evidence from Peru

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  • Lahura, Erick

    ()
    (Central Bank of Peru
    Universidad Catolica del Peru)

  • Vega, Marco

    ()
    (Central Bank of Peru
    Universidad Catolica del Peru)

Abstract

Under inflation targeting and other related monetary policy regimes, the identification of non-transitory in ation 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 a VAR-based long-run criterion as an alternative criteria for evaluating core inflation measures. Evidence from Peru shows that WIMs are superior to official core inflation in terms of both the proposed criterion and forecast-based criteria.

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Bibliographic Info

Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2011-019.

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Date of creation: Dec 2011
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Handle: RePEc:rbp:wpaper:2011-019

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Keywords: Core infl ation; wavelets; forecast; structural VAR;

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  1. 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.
  2. kevin dowd & john cotter, 2011. "U.S. Core Inflation: A Wavelet Analysis," Papers 1103.5659, arXiv.org.
  3. 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.
  4. Ribba, Antonio, 2003. "Permanent-transitory decompositions and traditional measures of core inflation," Economics Letters, Elsevier, vol. 81(1), pages 109-116, October.
  5. Christoph Schleicher, 2002. "An Introduction to Wavelets for Economists," Working Papers 02-3, Bank of Canada.
  6. 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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