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Choosing between alternative measures of core inflation using bounded rationality and cognitive biases

  • Pelinescu, Elena

    (Institute for Economic Forecasting, Romanian Academy, Bucharest)

  • Dospinescu, Andrei Silviu

    (Centre for Industrial Economics and Services, Romanian Academy, Bucharest)

The paper intends to synthetically present a possible use of bounded rationality and cognitive biases in the evaluation of different core inflation measurements. As a consequence, the paper starts by synthetically presenting the main approaches to computing core inflation. We continue by analyzing the concept of bounded rationality and cognitive biases and their possible use in understanding the movement in different prices. The paper computes different measures of core inflation using methods based on excluding certain categories of prices from overall inflation rate and methods based on excluding from the overall inflation rate temporary movements of various prices which on different moments register extremely high volatility (using trimmed methodology). We analyze the impact of bounded rationality and cognitive biases on the movement of different prices and we suggest criteria for choosing between different measurement of core inflation and for computing a compound measurement of core inflation which takes into account the manifestation of cognitive biases. The natural continuation of the analysis will be to conduct an experiment which will allow us to quantitatively measure the impact of cognitive biases and consequently to determine the weights used in constructing the compound core inflation measurement.

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Article provided by Centre for Industrial Economics and Services in its journal Revista de Economie Industriala (Journal of Industrial Eonomics).

Volume (Year): 6 (2008)
Issue (Month): 1 (March)
Pages: 42-52

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Handle: RePEc:cei:recind:v:6:y:2008:i:1:p:42-52
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