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Measuring China's core inflation for forecasting purposes: taking persistence as weight

Author

Listed:
  • Zhiyong Fan

    (Renmin University of China)

  • Yushan Hu

    (Renmin University of China)

  • Penglong Zhang

    (Tsinghua University)

Abstract

This paper constructs China's core inflation index based on persistence weights for monetary policy and inflation forecast. We apply the univariate autoregression model (AR), whereby the sum of autoregression coefficients is used to measure inflation persistence. Due to the possible unit root, we adopt the grid-bootstrap method to obtain the estimates for the inflation persistence. We re-weight the importance of each CPI component, according to its relative persistence. By comparing with traditional core inflation and headline inflation, we find that the persistence-weighted core inflation, is a leading indicator and an attractor of China's headline inflation, with a strong ability to predict the short-term headline inflation, as well as monetary policy decisions.

Suggested Citation

  • Zhiyong Fan & Yushan Hu & Penglong Zhang, 2022. "Measuring China's core inflation for forecasting purposes: taking persistence as weight," Empirical Economics, Springer, vol. 63(1), pages 93-111, July.
    • Handle: RePEc:spr:empeco:v:63:y:2022:i:1:d:10.1007_s00181-021-02128-x
    DOI: 10.1007/s00181-021-02128-x
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    Cited by:

    1. Shenglong Liu & Penglong Zhang, 2022. "Foreign Direct Investment and Air Pollution in China: Evidence from the Global Financial Crisis," The Developing Economies, Institute of Developing Economies, vol. 60(1), pages 30-61, March.

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    More about this item

    Keywords

    Inflation persistence; Core inflation; Inflation forecast;
    All these keywords.

    JEL classification:

    • 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: Models and Applications
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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