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Evaluating Core Inflation

  • C.R. Marques
  • P.D. Neves
  • L.M. Sarmento

This paper proposes testable conditions that core inflation measures should satisfy. Trend inflation indicators calculated by Banco de Portugal are tested against this background. The major conclusion is that the so-called "underlying inflation", the "10% trimmed mean", and the "25% trimmed mean" do not meet the proposed conditions. However, they are satisfied by the "37-month centred moving average", the "first principal component" and the "standard deviation weighted CPI" indicators. Yet, only the last two indicators can be used as useful core inflation measures, as the first one is not computable in real time.

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Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 66.

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Length: 20 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:dnb:staffs:66
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  1. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
  2. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
  3. Thérèse Laflèche, 1997. "Statistical measures of the trend rate of inflation," Bank of Canada Review, Bank of Canada, vol. 1997(Autumn), pages 29-47.
  4. Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Papers 9903, Federal Reserve Bank of Dallas.
  5. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  6. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient inflation estimation," Working Paper 9707, Federal Reserve Bank of Cleveland.
  7. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
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