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Core inflation rates: a comparison of methods based on west German data

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  • Landau, Bettina
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    Abstract

    This study compares different methods of calculating the core inflation rate, the latter being taken as the general price trend, i.e. the persistent component of measured inflation. This price trend is therefore assumed to be free of transitory price movements. This paper focuses on an empirical analysis of data taken from the consumer price index for (western) Germany. In addition, the different methods are examined critically from a theoretical perspective, focusing on two types of procedure: statistical methods and methods based on economic theory. The latter include a new procedure which is based on the P* approach. In order to assess the advantages and disadvantages of the various approaches, certain features of the core rates are tested, i.e. to establish whether they meet certain criteria, which would determine their suitability as indicators of the price trend. The principal finding of the study is that core inflation rates – irrespective of the method chosen – are not always able to meet the requirements. The methods encounter particular difficulties with regard to avoiding bias in relation to measured inflation, these problems being aggravated when adjustments are made to account for the effects of taxation. The predictive quality with regard to measured inflation also frequently leaves a great deal to be desired. In particular, however, the methods are unable to distinguish adequately between transitory and permanent components of the inflation rate. Statistical core inflation rates perform relatively well, while core rates based on economic theory suffer, in particular, from a constant need for revision. Even so, the newly introduced P* method is convincing, at least in the latter category. Given the relatively poor overall outcome, it would appear advisable not to use core inflation rates as the sole monetary policy indicators; however, they are a useful complement to measured inflation. Moreover, rather than focusing on one method only, it would be better to combine several selected methods. -- Die vorliegende Studie präsentiert einen Vergleich zwischen verschiedenen Methoden für die Kalkulation der Kerninflationsrate. Dabei wird die Kerninflation als der generelle Preistrend, d.h. die persistente Komponente der gemessenen Inflation, aufgefasst. Dieser soll somit frei von transitorischen Preisbewegungen sein. Im Mittelpunkt der Arbeit steht eine empirische Analyse von Daten für den Preisindex für die Lebenshaltung für (West-)Deutschland. Daneben werden die Methoden aus theoretischer Sicht kritisch beleuchtet. Zwei Verfahrensstränge stehen dabei im Vordergrund: Statistische Methoden und Methoden auf der Basis der ökonomischen Theorie. Im Rahmen der letzteren wird auch ein neues Verfahren vorgestellt, das auf dem P*-Ansatz beruht. Um Vor- und Nachteile der verschiedenen Ansätze einzuschätzen, werden die Kernraten auf einige ihrer Eigenschaften geprüft, d.h. darauf, ob sie gewisse Kriterien erfüllen, damit sie als Indikator für den Preistrend geeignet sind. Als Hauptergebnis der Arbeit ist zu konstatieren, dass die Kerninflationsraten ? unabhängig von der gewählten Methode ? die an sie gestellten Anforderungen nicht immer erfüllen können. Die Methoden haben insbesondere bei der Mittelwerterhaltung Probleme, die sich bei Korrektur um Steuereffekte verschärfen. Auch die Prognosegüte im Hinblick auf die gemessene Inflation lässt häufig zu wünschen übrig. Insbesondere aber können sie nicht adäquat zwischen transitorischer und permanenter Komponente der Inflationsrate differenzieren. Relativ gut schneiden die statistischen Kerninflationsraten ab. Kernraten auf der Basis der ökonomischen Theorie leiden insbesondere unter einem ständigen Revisionsbedarf. Die neu vorgestellte P*-Methode kann dennoch zumindest in dieser Klasse überzeugen. Aufgrund des insgesamt relativ ungünstigen Resultats erscheint es ratsam, Kerninflationsraten nicht als alleinige geldpolitische Indikatoren zu verwenden; ihre Verwendung komplementär zur gemessenen Inflation ist aber sinnvoll. Zudem sollte man sich nicht auf eine Methode konzentrieren, sondern einige ausgewählte Methoden miteinander kombinieren.

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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2000,04.

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    Date of creation: 2000
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    Handle: RePEc:zbw:bubdp1:4140

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    1. Ball, Laurence & Mankiw, N. Gregory, 1999. "Interpreting the Correlation Between Inflation and the Skewness of Relative Prices: A Comment on Bryan and Cecchetti," Scholarly Articles 3415439, Harvard University Department of Economics.
    2. Danny Quah & Danny Quah & Shaun P. Vahey, 1995. "Measuring Core Inflation," CEP Discussion Papers dp0254, Centre for Economic Performance, LSE.
    3. Stephen G. Cecchetti, 1996. "Measuring Short-Run Inflation for Central Bankers," NBER Working Papers 5786, National Bureau of Economic Research, Inc.
    4. Ball, Laurence & Mankiw, N Gregory, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 161-93, February.
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    7. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," Working Paper 94-2, Federal Reserve Bank of Atlanta.
    8. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The Consumer Price Index as a Measure of Inflation," NBER Working Papers 4505, National Bureau of Economic Research, Inc.
    9. Wynne, Mark A., 1999. "Core inflation: a review of some conceptual issues," Working Paper Series 0005, European Central Bank.
    10. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient inflation estimation," Working Paper 9707, Federal Reserve Bank of Cleveland.
    11. Claus, I., 1997. "A Measure of Underlying Inflation in the United States," Working Papers 97-20, Bank of Canada.
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    13. Robalo Marques, Carlos & Duarte Neves, Pedro & Morais Sarmento, Luis, 2003. "Evaluating core inflation indicators," Economic Modelling, Elsevier, vol. 20(4), pages 765-775, July.
    14. Michael F. Bryan & Christopher J. Pike, 1991. "Median price changes: an alternative approach to measuring current monetary inflation," Economic Commentary, Federal Reserve Bank of Cleveland, issue Dec.
    15. Lars E.O. Svensson, 2000. "How Should Monetary Policy be Conducted in an Era of Price Stability?," NBER Working Papers 7516, National Bureau of Economic Research, Inc.
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    18. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
    19. Laurence Ball & N. Gregory Mankiw, 1999. "Interpreting The Correlation Between Inflation And The Skewness Of Relative Prices: A Comment On Bryan And," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 197-198, May.
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    22. Jeffrey J. Hallman & Richard D. Porter & David H. Small, 1989. "M2 per unit of potential GNP as an anchor for the price level," Staff Studies 157, Board of Governors of the Federal Reserve System (U.S.).
    23. repec:wop:imespe:9707 is not listed on IDEAS
    24. Thérèse Laflèche, 1997. "Statistical measures of the trend rate of inflation," Bank of Canada Review, Bank of Canada, vol. 1997(Autumn), pages 29-47.
    25. Hilde Christiane Bjørnland, 1997. "Estimating Core Inflation - The Role of Oil Price Shocks and Imported Inflation," Discussion Papers 200, Research Department of Statistics Norway.
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    Cited by:
    1. Bermingham, Colin, 2010. "A critical assessment of existing estimates of US core inflation," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 993-1007, December.

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