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Do underlying measures of inflation outperform headline rates? Evidence from Australian data

  • Lei Lei Song

Many central banks often focus on underlying measures of inflation when assessing inflation trends. This paper compares the accuracy of underlying measures of inflation relative to the headline rates by using Australia data. It is found that the underlying measures did have smaller errors in predicting the long-term trend in inflation than the quarterly headline rate due to the volatility in the headline rate. As compared to the year-ended headline rate, the statistical test results, however, support only the measure of market prices excluding volatile items, not the others. There is some weak evidence of the weighted median measure outperforming the headline rate in the sub-period after 1993. With respect to directional accuracy, the test statistics cannot reject the null hypothesis of an equal probability correctly predicting the moving direction of the inflation trend, though the headline rates have a higher probability.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/0003684042000295322
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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 37 (2005)
Issue (Month): 3 ()
Pages: 339-345

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Handle: RePEc:taf:applec:v:37:y:2005:i:3:p:339-345
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  1. Robert Dixon & Guay Lim, 2003. "Underlying Inflation in Australia: Are the Existing Measures Satisfactory?," Department of Economics - Working Papers Series 878, The University of Melbourne.
  2. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-44, September.
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  5. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
  6. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
  7. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, August.
  8. Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Papers 9903, Federal Reserve Bank of Dallas.
  9. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
  10. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
  11. Stephen G. Cecchetti & Erica L. Groshen, 2000. "Understanding Inflation: Implications for Monetary Policy," NBER Working Papers 7482, National Bureau of Economic Research, Inc.
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