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A factorial decomposition of inflation in Peru: an alternative measure of core inflation

  • Alberto Humala
  • Gabriel Rodríguez

A dynamic factorial decomposition model of inflation is estimated using Peruvian monthly data for January 1995--July 2008. This model allows the identification of changes in three relevant inflation components: idiosyncratic relative prices, aggregate relative prices and absolute prices. Furthermore, following Reis and Watson (2007), the model allows measuring pure inflation as the common factor in the inflation rate that has a proportionate effect to all prices and that is not correlated with relative-price changes at any period of time. This pure inflation estimate relates closely to standard measures of core inflation. The results are robust to different lag structures and various stochastic assumptions on the estimated factors.

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File URL: http://hdl.handle.net/10.1080/13504851.2011.627207
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Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 19 (2012)
Issue (Month): 14 (September)
Pages: 1331-1334

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Handle: RePEc:taf:apeclt:v:19:y:2012:i:14:p:1331-1334
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  1. Riccardo Cristadoro & Mario Forni & Lucrezia Reichlin & Giovanni Veronese, 2001. "A core inflation index for the euro area," Temi di discussione (Economic working papers) 435, Bank of Italy, Economic Research and International Relations Area.
  2. Altissimo, Filippo & Mojon, Benoit & Zaffaroni, Paolo, 2009. "Can aggregation explain the persistence of inflation?," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 231-241, March.
  3. Boivin, Jean & Giannoni, Marc P. & Mihov, Ilian, 2006. "Sticky prices and monetary policy: Evidence from disaggregated US data," CFS Working Paper Series 2007/14, Center for Financial Studies (CFS).
  4. Bai, Jushan, 2004. "Estimating cross-section common stochastic trends in nonstationary panel data," Journal of Econometrics, Elsevier, vol. 122(1), pages 137-183, September.
  5. Michal Brzoza-Brzezina & Jacek Kotlowski, 2009. "Estimating pure inflation in the Polish economy," Working Papers 37, Department of Applied Econometrics, Warsaw School of Economics.
  6. Marlene Amstad & Simon Potter, 2009. "Real time underlying inflation gauges for monetary policymakers," Staff Reports 420, Federal Reserve Bank of New York.
  7. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
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