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Estimates of and Problems with Core Inflation in Hungary

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  • Sandor Valkovszky
  • Janos Vincze

Abstract

The traditional CPI measure has many drawbacks, when used for very different purposes, and it is not at all surprising that a great deal of work has been devoted to its improvement. Besides seasonal adjustment, various other techniques have been developed to find the "core" inflation index. Although a generally accepted definition of core inflation does not exist, the literature converges towards identifying certain desirable properties that a "good" core index must possess. After reviewing the literature we describe how the publication of a core index fits into the monetary policy strategy of the National Bank of Hungary. Monetary policy both in the form of setting the instruments and by communicating to the public is geared to arrive at a mutual understanding with the markets. By publishing a core inflation index, the NBH aims at providing the public with a price measure that can function as a co-ordination device between policy makers and market participants. As the "index number" problem is clearly connected with relative price changes, we analyze in some depth this issue, too. We argue that there have been clearly visible tendencies in relative price developments that jeopardize some of the traditional uses of inflation measures. Our results suggest that a substantial amount of noise and apparent seasonality have come about as a result of government decisions. Finally we muster some possible procedures to define core indices in Hungary, by comparing their smoothness and forecasting ability from several points of view. Our conclusion is that there is no overwhelming reason to abandon the current "exclusion" approach toward the core.

Suggested Citation

  • Sandor Valkovszky & Janos Vincze, 2001. "Estimates of and Problems with Core Inflation in Hungary," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 1(1), pages 69-99.
  • Handle: RePEc:tcb:cebare:v:1:y:2001:i:1:p:69-99
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    References listed on IDEAS

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    1. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 205-228.
    2. Wyplosz, Charles, 2000. "Ten Years of Transformation: Macroeconomic Lessons," CEPR Discussion Papers 2254, C.E.P.R. Discussion Papers.
    3. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins, 1997. "Efficient inflation estimation," Working Paper 9707, Federal Reserve Bank of Cleveland.
    4. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
    5. Paula De Masi & Vincent Koen, 1997. "Prices in the Transition; Ten Stylized Facts," IMF Working Papers 97/158, International Monetary Fund.
    6. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-261, March.
    7. Mihály András Kovács & András Simon, 1998. "The components of the real exchange rate in Hungary," MNB Working Papers 1998/3, Magyar Nemzeti Bank (Central Bank of Hungary).
    8. Driffill, John & Mizon, Grayham E. & Ulph, Alistair, 1990. "Costs of inflation," Handbook of Monetary Economics,in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 19, pages 1013-1066 Elsevier.
    9. Cukierman, Alex, 1982. "Relative price variability, inflation and the allocative efficiency of the price system," Journal of Monetary Economics, Elsevier, vol. 9(2), pages 131-162.
    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.
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    Citations

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    Cited by:

    1. Piotr Wiesiolek & Anna Kosior, 2010. "To what extent can we trust core inflation measures? The experience of CEE countries," BIS Papers chapters,in: Bank for International Settlements (ed.), Measurement of inflation and the Philippine monetary policy framework, volume 49, pages 297-323 Bank for International Settlements.
    2. Sandor Valkovszky & Janos Vincze, 2001. "On price level stability, real interest rates and core inflation," BIS Papers chapters,in: Bank for International Settlements (ed.), Modelling aspects of the inflation process and the monetary transmission mechanism in emerging market countries, volume 8, pages 151-174 Bank for International Settlements.
    3. Vincze, János & Ferenczi, Barnabás & Valkovszky, Sándor, 2000. "Mire jó a fogyasztóiár-statisztika?
      [What use are consumer-price statistics?]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 751-774.

    More about this item

    Keywords

    Core Inflation; Price Index; Exclusion Approach;

    JEL classification:

    • 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
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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