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Estimates of and Problems with Core Inflation in Hungary

  • Sandor Valkovszky
  • Janos Vincze

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.

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File URL: https://www3.tcmb.gov.tr/cbr/index.php/cbreview/article/view/330/290
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Article provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its journal Central Bank Review.

Volume (Year): 1 (2001)
Issue (Month): 1 ()
Pages: 69-99

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Handle: RePEc:tcb:cebare:v:1:y:2001:i:1:p:69-99
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  1. Wyplosz, Charles, 2000. "Ten years of transformation - macroeconomic lessons," Policy Research Working Paper Series 2288, The World Bank.
  2. Laurence Ball & N. Gregory Mankiw, 1992. "Asymmetric Price Adjustment and Economic Fluctuations," NBER Working Papers 4089, National Bureau of Economic Research, Inc.
  3. Wynne, Mark A., 1999. "Core inflation: a review of some conceptual issues," Working Paper Series 0005, European Central Bank.
  4. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient Inflation Estimation," NBER Working Papers 6183, National Bureau of Economic Research, Inc.
  5. Mihály András Kovács & András Simon, 1998. "The components of the real exchange rate in Hungary," MNB Working Papers 1998/3, Magyar Nemzeti Bank (the central bank of Hungary).
  6. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
  7. Driffill, John & Mizon, Grayham Ernest & Ulph, Alistair Mitchell, 1989. "Costs of Inflation," CEPR Discussion Papers 293, C.E.P.R. Discussion Papers.
    • 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.
  8. Paula De Masi & Vincent Koen, 1997. "Prices in Transition; Ten Stylized Facts," IMF Working Papers 97/158, International Monetary Fund.
  9. 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.
  10. 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.
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