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Improving the Measurement of Core Inflation in Colombia Using Asymmetric Trimmed Means

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  • Carlos Felipe Jaramillo

Abstract

The study evaluates the virtues of asymmetric trimmed means as efficient estimators of core inflation for Colombia, an economy with high and variable inflation rates. Results suggest that the proposed indicators are more efficient than alternative indexes and are particularly suited for environments where price change distributions are non-normal. Computations indicate that an optimally trimmed estimator for the 27-component Colombian CPI during the 1972:06 to 1997: 12 period requires that 12 percent be trimmed from the upper tail and 24 percent from the lower tail. This indicator exhibits substantially higher efficiency than the weighted average of price changes (i-e.,CPI inflation), the CPI excluding food and energy, the median and symmetric trimmmed means. These findings are robust to changes in the 36-month centered moving average benchmarck of annual inflation. the medain and symmmetric trimmed means. These findings are robust changes in the 36-month centerd moving average benchmark of annual inflation. The optimal estimator is not found to be robust to changes in data sample. This is likely due to changes in parameters of the underying data distribution due to structural changes in the Colombian economy, particularly in the post-1990 period. Optimal levels of asymmetrical trimming are also found to be highly sensitive to the degree of disaggregation of the CPI data. This is expected since greater disaggregation reveals higher kurtosis and skewness of the underying data. The CPI excluding food and energy and the median do not seem to provide persistent efficiency gaings in estimation of inflation with respect to the weighted mean. Food and energy prices are critical sectors of middle income economies such as Colombia and contain valuable information about medium and long-term trends in inflation. Finally, the median excludes many prices-especially those in the upper tail- that seem to contain valuable information about long-term trends in inflation.

Suggested Citation

  • Carlos Felipe Jaramillo, 1998. "Improving the Measurement of Core Inflation in Colombia Using Asymmetric Trimmed Means," Borradores de Economia 091, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:091
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    References listed on IDEAS

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    1. Mizon, Grayham E & Safford, J Claire & Thomas, Stephen H, 1990. "The Distribution of Consumer Price Changes in the United Kingdom," Economica, London School of Economics and Political Science, vol. 57(226), pages 249-262, May.
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    3. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins, 1997. "Efficient inflation estimation," Working Paper 9707, Federal Reserve Bank of Cleveland.
    4. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters,in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
    5. Jaramillo Carolos Felipe, 1997. "Tendencias de los precios relativos de los alimentos en Colombia," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, March.
    6. Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
    7. Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 161-193.
    8. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
    9. Blejer, Mario I, 1983. "On the Anatomy of Inflation: The Variability of Relative Commodity Prices in Argentina," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(4), pages 469-482, November.
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