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Core Inflation and Inflation Targeting in a Developing Economy

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Author Info
Luis A. Rivas (Department of Economics, Vanderbilt University and Banco Central de Nicaragua)
Abstract

This paper is concerned with inflation targeting as a potential monetary policy objective in a developing economy. Using data from Nicaragua, it first studies the extent to which the Consumer Price Index (CPI) could be used to formulate short-run inflation targets. It is found that due to the particular cross-sectional properties of the relative-price distributions, the rate of change in the CPI may not be the best index for this purpose. As a consequence, the paper is also concerned with the choice of alternative indicators of inflation and their statistical properties. These alternative measures are ranked according to their ability to forecast the rate of change in the price level. Finally, the relationship between the dispersion and skewness of the relative-price distribution and generalized inflation is studied using time series analysis.

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File URL: http://www.vanderbilt.edu/Econ/wparchive/workpaper/vu02-w07.pdf
File Format: application/pdf
File Function: First version, 2002
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Publisher Info
Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number 0207.

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Date of creation: May 2003
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Handle: RePEc:van:wpaper:0207

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Related research
Keywords: Core inflation; developing economies; forecasting; monetary policy; price index; tiem-series;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
O54 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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References listed on IDEAS
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    Other versions:
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  14. Michael Woodford, 1994. "Nonstandard Indicators for Monetary Policy: Can Their Usefulness Be Judged from Forecasting Regressions?," NBER Chapters, in: Monetary Policy, pages 95-115 National Bureau of Economic Research, Inc. [Downloadable!]
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  20. repec:cup:cbooks:9780521556231 is not listed on IDEAS
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  22. Balke, Nathan S. & Wynne, Mark A., 2000. "An equilibrium analysis of relative price changes and aggregate inflation," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 269-292, April. [Downloadable!] (restricted)
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  23. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
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  26. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
    Other versions:
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