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Evaluating Core Inflation Measures in Pakistan

Author

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  • Muhammad Amin Khan Lodhi

    (State Bank of Pakistan)

Abstract

The concept of core inflation is getting common and several core inflation series have been estimated in Pakistan. However, no attempt has been made to study if these estimated series of core inflation are actually serving the purpose they were designed for. The main objective of this study is to evaluate core inflation measures in Pakistan on some absolute criteria. Nine different core inflation series have been tested for the three conditions proposed by Marques et al. (2000). Results suggest that none of the series based on excluding fixed items approach (one of which is also being used by SBP) satisfy these basic conditions. In contrast, all trim-based core inflation measures are satisfying basic conditions, but systematically underestimate true core inflation. For example, the currently used 20 percent trim-basket (10 percent from each end) by SBP underestimates true core inflation by 20 basis points on average. Length: 24 pages

Suggested Citation

  • Muhammad Amin Khan Lodhi, 2007. "Evaluating Core Inflation Measures in Pakistan," SBP Working Paper Series 18, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:18
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    File URL: http://www.sbp.org.pk/repec/sbp/wpaper/wp18.pdf
    File Function: First version, 2007
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    References listed on IDEAS

    as
    1. Hasan Bakhshi & Tony Yates, 1999. "To trim or not to trim? An application of a trimmmed mean inflation estimator to the United Kingdom," Bank of England working papers 97, Bank of England.
    2. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The consumer price index as a measure of inflation," Economic Review, Federal Reserve Bank of Cleveland, vol. 29(Q IV), pages 15-24.
    3. Scott Roger, 1997. "A robust measure of core inflation in New Zealand, 1949-96," Reserve Bank of New Zealand Discussion Paper Series G97/7, Reserve Bank of New Zealand.
    4. Robalo Marques, Carlos & Duarte Neves, Pedro & Morais Sarmento, Luis, 2003. "Evaluating core inflation indicators," Economic Modelling, Elsevier, vol. 20(4), pages 765-775, July.
    5. Pelin Berkmen, 2002. "Measuring Core Inflation for Turkey - Trimmed Means Approach," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 2(2), pages 1-18.
    6. Mr. Scott Roger, 2000. "Relative Prices, Inflation and Core Inflation," IMF Working Papers 2000/058, International Monetary Fund.
    7. Sadia Tahir, 2003. "Core Inflation Measures for Pakistan," SBP Working Paper Series 04, State Bank of Pakistan, Research Department.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Riaz Riazuddin & Muhammad Amin Khan Lodhi & Muhammad Ashfaq & Behzad Ali Ahmad, 2013. "A New Measure of Core Inflation in Pakistan," SBP Working Paper Series 66, State Bank of Pakistan, Research Department.

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    More about this item

    Keywords

    Core inflation measures; trimmed mean;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics

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