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Core Inflation and Trend Inflation

Author

Listed:
  • James H. Stock

    (Harvard University and NBER)

  • Mark W. Watson

    (Princeton University and NBER)

Abstract

This paper examines empirically whether the measurement of trend inflation can be improved by using disaggregated data on sectoral inflation to construct indexes akin to core inflation but with a time-varying distributed lags of weights, where the sectoral weight depends on the timevarying volatility and persistence of the sectoral inflation series and on the comovement among sectors. The modeling framework is a dynamic factor model with time-varying coefficients and stochastic volatility as in Del Negro and Otrok (2008), and is estimated using U.S. data on seventeen components of the personal consumption expenditure inflation index.

Suggested Citation

  • James H. Stock & Mark W. Watson, 2016. "Core Inflation and Trend Inflation," The Review of Economics and Statistics, MIT Press, vol. 98(4), pages 770-784, October.
    • Handle: RePEc:tpr:restat:v:98:y:2016:i:4:p:770-784
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    More about this item

    Keywords

    inflation forecasts; non-Gaussian state space; time-varying parameters; dissagregated prices;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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