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Food and Energy Prices in Core Inflation

  • Jim Lee

    ()

    (Texas A&M University-Corpus Christi)

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Many central bankers have made monetary policy decisions by focusing on core inflation data that exclude food and energy prices from overall inflation. In this paper, estimation results from multivariate GARCH models show that food prices not only help forecast future core inflation, but their conditional variance also affects the conditional variance of core inflation. Energy prices, on the other hand, affect core inflation primarily through the GARCH-in-mean effect. To the extent that food and energy prices affect the underlying trend and volatility of overall inflation, policymakers should not ignore these components in their assessment of future inflation risk.

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File URL: http://www.accessecon.com/Pubs/EB/2009/Volume29/EB-09-V29-I2-P34.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 2 ()
Pages: 847-860

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Handle: RePEc:ebl:ecbull:eb-08e30007
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  1. William T. Gavin & Rachel J. Mandal, 2002. "Predicting inflation: food for thought," The Regional Economist, Federal Reserve Bank of St. Louis, issue Jan., pages 4-9.
  2. Wynne, Mark A., 1999. "Core inflation: a review of some conceptual issues," Working Paper Series 0005, European Central Bank.
  3. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
  4. Robert Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 19-38.
  5. Robert J. Gordon, 1975. "Alternative Responses of Policy to External Supply Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 183-206.
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