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Disinflation and Reliability of Underlying Inflation Measures

Author

Listed:
  • Elena Deryugina

    (Bank of Russia)

  • Alexey Ponomarenko

    (Bank of Russia)

Abstract

We estimated a non-Stationary dynamic factor model and used it to generate artificial episodes of disinflation (permanent changes in the mean inflation rate). These datasets were used to test the forecasting abilities of alternative underlying inflation indicators (i.e. measures that capture sustained movements in inflation extracted from information in a disaggregated set of price data). We found that the out of sample forecast errors of the benchmark underlying inflation measures (based on unobserved trend extraction) are more severely affected by disinflation than the alternative simpler methods (based on exclusion or re-weighting approaches). We also show that a non-stationary dynamic factor model may be employed for the extraction of the unobserved trend to be used as an underlying inflation measure.

Suggested Citation

  • Elena Deryugina & Alexey Ponomarenko, 2020. "Disinflation and Reliability of Underlying Inflation Measures," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 12(1), pages 91-111, March.
    • Handle: RePEc:psc:journl:v:12:y:2020:i:1:p:91-111
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    References listed on IDEAS

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    1. Elena Deryugina & Alexey Ponomarenko, 2020. "Disinflation and Reliability of Underlying Inflation Measures," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 12(1), pages 91-111, March.

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    More about this item

    Keywords

    underlying inflation; non-stationary dynamic factor model; Russia;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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