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U.S. Core Inflation: A Wavelet Analysis

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  • Kevin Dowd

    (The University of Nottingham, UK)

  • John Cotter

    (University College Dublin, Ireland)

Abstract

This paper proposes the use of wavelet methods to estimate U.S. core inflation. It explains wavelet methods and suggests they are ideally suited to this task. Comparisons are made with traditional CPI-based and regression-based measures for their performance in following trend inflation and predicting future inflation. Results suggest that wavelet-based measures perform better, and sometimes much better, than the traditional approaches. These results suggest that wavelet methods are a promising avenue for future research on core inflation.

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File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp200617.pdf
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Bibliographic Info

Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 200617.

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Length: 50 pages
Date of creation: 24 Jun 2011
Date of revision:
Handle: RePEc:ucd:wpaper:2006/17

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Keywords: core inflation; wavelets; trend inflation; inflation prediction;

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References

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  1. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand.
  2. Wynne, Mark A., 1999. "Core inflation: a review of some conceptual issues," Working Paper Series 0005, European Central Bank.
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  4. Stephen G. Cecchetti, 1996. "Measuring Short-Run Inflation for Central Bankers," NBER Working Papers 5786, National Bureau of Economic Research, Inc.
  5. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient inflation estimation," Working Paper 9707, Federal Reserve Bank of Cleveland.
  6. Robert Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
  7. Hogan, Seamus & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
  8. Christoph Schleicher, 2002. "An Introduction to Wavelets for Economists," Working Papers 02-3, Bank of Canada.
  9. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-44, September.
  10. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
  11. Max Stevenson, 2001. "Filtering and Forecasting Spot Electricity Prices in the Increasingly Deregulated Australian Electricity Market," Research Paper Series 63, Quantitative Finance Research Centre, University of Technology, Sydney.
  12. Carlos Robalo Marques & Pedro Duarte Neves & Luís Morais Sarmento, 2000. "Evaluating Core Inflation Indicators," Working Papers w200003, Banco de Portugal, Economics and Research Department.
  13. Vega, Juan Luis & Wynne, Mark A., 2001. "An evaluation of some measures of core inflation for the euro area," Working Paper Series 0053, European Central Bank.
  14. L.J. Álvarez & M de los Llanos Matea, 2001. "Underlying Inflation Measures in Spain," DNB Staff Reports (discontinued) 60, Netherlands Central Bank.
  15. Todd E. Clark, 2001. "Comparing measures of core inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-31.
  16. Julie K. Smith, 2012. "PCE inflation and core inflation," Working Papers 1203, Federal Reserve Bank of Dallas.
  17. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
  18. Smith, Julie K, 2004. "Weighted Median Inflation: Is This Core Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 253-63, April.
  19. Ramsey, James B. & Zhang, Zhifeng, 1997. "The analysis of foreign exchange data using waveform dictionaries," Journal of Empirical Finance, Elsevier, vol. 4(4), pages 341-372, December.
  20. Ramsey, James B. & Lampart, Camille, 1998. "Decomposition Of Economic Relationships By Timescale Using Wavelets," Macroeconomic Dynamics, Cambridge University Press, vol. 2(01), pages 49-71, March.
  21. Mark J. Jensen, 1997. "Using Wavelets to Obtain a Consistent Ordinary Least Squares Estimator of the Long Memory Parameter," Econometrics 9710002, EconWPA.
  22. 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.
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Citations

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Cited by:
  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. Andersson, Fredrik N. G., 2008. "Core Inflation - Why the Federal Reserve Got it Wrong," Working Papers 2008:19, Lund University, Department of Economics.
  3. Erick Lahura & Marco Vega, 2011. "Evaluation of Wavelet-based Core Inflation Measures: Evidence from Peru," Documentos de Trabajo 2011-320, Departamento de Economía - Pontificia Universidad Católica del Perú.
  4. David Baqaee, 2009. "Using wavelets to measure core inflation: the case in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2009/05, Reserve Bank of New Zealand.

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