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Measuring Core Inflation

Author

Listed:
  • Danny Quah
  • Danny Quah
  • Shaun P. Vahey

Abstract

In this paper we argue that measured (RPI) inflation is conceptually mismatched with core inflation: the difference is more than just "measurement error". We propose a technique for measuring core inflation, based on an explicit long-run economic hypothesis. Core inflation is defined as that component of measured inflation that has no (medium-to) long-run impact on real output - a notion that is consistent with the vertical long-run Phillips curve interpretation of the co-movement in inflation and output. We construct a measure of core inflation by placing dynamic restrictions on a vector autoregression (VAR) system.

Suggested Citation

  • Danny Quah & Danny Quah & Shaun P. Vahey, 1995. "Measuring Core Inflation," CEP Discussion Papers dp0254, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp0254
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    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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