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A first assessment of some measures of core inflation for the euro area

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  • Vega, Juan-Luis
  • Wynne, Mark A.

    () (Federal Reserve Bank of Dallas)

Abstract

Core inflation plays an important role in the deliberations of monetary policymakers. In this paper we evaluate a number of measures of core inflation constructed using euro area data. In addition to the traditional exclusion-type core measures, we examine two newer ones, documenting their properties and evaluating their performance in terms of their ability to track underlying or trend inflation in real time. We focus on core measures derived from the Harmonized Index of Consumer Prices (HICP) as the European Central Bank has chosen to define its mandate for price stability in terms of this index, and because this is the only index of consumer prices that is compiled in an comparable manner across all members of the European Union. We document significant excess kurtosis in the cross-section distribution of price changes in the euro area, and show that several categories of prices are more volatile than those typically excluded from traditional measures of core inflation. Contrary to what one might expect, traditional measures of core inflation are not significantly less volatile than headline measures. We document the superior performance of alternative measures of core inflation in tracking trend inflation on average, but show that none of the various measures of core gave significant advance warning of the pickup in trend inflation at the beginning of 1999.

Suggested Citation

  • Vega, Juan-Luis & Wynne, Mark A., 2002. "A first assessment of some measures of core inflation for the euro area," Working Papers 0205, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddwp:0205
    Note: Published as: Vega, Juan-Luis and Mark A. Wynne (2003), "A First Assessment of Some Measures of Core Inflation for the Euro Area," German Economic Review 4 (3): 269-306.
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    References listed on IDEAS

    as
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    Cited by:

    1. Felipe Córdova & María Carolina Grünwald & Michael Pedersen, 2008. "Alternative Measures of Core Inflation in Chile," Working Papers Central Bank of Chile 471, Central Bank of Chile.
    2. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia.
    3. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among Them," IMF Working Papers 06/97, International Monetary Fund.
    4. Emil Stavrev, 2010. "Measures of underlying inflation in the euro area: assessment and role for informing monetary policy," Empirical Economics, Springer, vol. 38(1), pages 217-239, February.
    5. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Staff Working Papers 06-10, Bank of Canada.
    6. Moons, Cindy & Garretsen, Harry & van Aarle, Bas & Fornero, Jorge, 2007. "Monetary policy in the New-Keynesian model: An application to the Euro Area," Journal of Policy Modeling, Elsevier, vol. 29(6), pages 879-902.
    7. Michael Pedersen, 2009. "An Alternative Core Inflation Measure," German Economic Review, Verein für Socialpolitik, vol. 10, pages 139-164, May.
    8. Abdul Aleem & Amine Lahiani, 2011. "Estimation and evaluation of core inflation measures," Applied Economics, Taylor & Francis Journals, vol. 43(25), pages 3619-3629.
    9. Edward N. Gamber & Julie K. Smith, 2016. "Time-series measures of core inflation," Working Papers 2016-008, The George Washington University, Department of Economics, Research Program on Forecasting.
    10. Adrian Armas & Lucy Vallejos & Marco Vega, 2010. "Measurement of price indices used by the central bank of Peru," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy and the measurement of inflation: prices, wages and expectations, volume 49, pages 259-283 Bank for International Settlements.
    11. Maria Arrazola & Jose de Hevia, 2008. "A simple inflation indicator for the euro zone," Applied Economics, Taylor & Francis Journals, vol. 40(18), pages 2387-2394.
    12. Liam J. A. Lenten, 2010. "Bananas and petrol: further evidence on the forecasting accuracy of the ABS 'headline' and 'underlying' rates of inflation," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(6), pages 556-572.
    13. Nicholas Apergis & Stephen M. Miller & Alexandros Panethimitakis & Athanassios Vamvakidis, 2005. "Inflation Targeting and Output Growth: Evidence from Aggregate European Data," Working papers 2005-06, University of Connecticut, Department of Economics.
    14. Komlan, Fiodendji, 2013. "The asymmetric reaction of monetary policy to inflation and the output gap: Evidence from Canada," Economic Modelling, Elsevier, vol. 30(C), pages 911-923.

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