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Alternative Measures of Core Inflation in Chile

  • Felipe Córdova
  • María Carolina Grünwald
  • Michael Pedersen

Inflation targeting central banks usually base their objectives on headline inflation, which is often affected by price movements of specific components whose behavior makes it difficult to extract clear signals about the inflationary outlook relevant for the monetary policy horizon. For this reason, several measures of underlying (core) inflation have been proposed with the purpose of removing this “noise”. This paper presents some alternatives calculated for the Chilean economy: three different measures that trim CPI components according to criteria of price changes and volatility, and two measures that re-weight the components according to historical volatility. In general terms, we find that the measures trimming away items with extreme price changes or high volatility are informative about the inflationary outlook given that they are unbiased with respect to the seasonally adjusted CPI and superior to other measures in tracking the headline inflation trend.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 471.

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Date of creation: May 2008
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Handle: RePEc:chb:bcchwp:471
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  1. M. Carolina Grünwald N. & Enrique Orellana C., 2004. "Medidas Alternativas de Inflación Subyacente," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 7(1), pages 93-101, April.
  2. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Michael Pedersen, 2006. "An Alternative Measure of Core Inflation," Working Papers Central Bank of Chile 366, Central Bank of Chile.
  4. Juan-Luis Vega & Mark A. Wynne, 2002. "A first assessment of some measures of core inflation for the euro area," Working Papers 0205, Federal Reserve Bank of Dallas.
  5. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  6. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among them," IMF Working Papers 06/97, International Monetary Fund.
  7. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
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