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Indicators of core inflation: Case of Tunisia

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Listed:
  • Ghrissi Mhamdi

    () (Université de Sousse)

  • Mounir Smida

    (Université de Sousse)

  • Ramzi Farhani

    (Université de Sousse)

Abstract

The aim of this paper is to provide a credible measure of inflation. This credibility is of great importance for successful inflation targeting regime. This paper proposes a technique to solve a conceptual disparity between inflation phenomenon and its measurement. For this, we proposed an alternative measure called core inflation, defined as the inflation component that has no real impact on long-term production. Evaluation of core inflation was obtained using a VAR system under the assumption that variations in the extent of inflation are affected by two types of shock. The first type has no impact on real output in the long term, while the second can have this effect. This approach is a reconstruction of the approach of Quah and Vahey (1995) in the case of the Tunisian economy. The study concluded that the administered prices constitute a major obstacle to measure, interpret and forecast inflation. Central Bank of Tunisia has no control over a third of the CPI basket. This feature of the Tunisian economy is simply a sign of weakness of the economic system and the need for monetary authorities to continue its efforts to liberalize prices. Introduction The concept of core inflation has played an important role in the decisions of responsible monetary policy in recent years. However, despite the centrality of this concept, there is still no consensus on the best measure of core inflation. The most widely adopted approach is the exclusion of certain categories of price inflation rate as a whole. It reflects the origin of the concept of core inflation during the turbulent 1970s. However, more recently, many economists are trying to set a robust measure of core inflation. Core inflation has become in recent years the most important subject of study for central banks of various countries. In fact, many of them are given as central or even ultimate objective of reducing inflation and achieving price stability. However, government policies other than monetary policy can play an important role in maintaining this goal. But the central bank sees its role as crucial when it admits that inflation can persist for a long time if it is tolerated by the monetary policy. It is important, then, that it should follow closely the evolution of the inflation rate.

Suggested Citation

  • Ghrissi Mhamdi & Mounir Smida & Ramzi Farhani, 2014. "Indicators of core inflation: Case of Tunisia," Post-Print halshs-01138432, HAL.
  • Handle: RePEc:hal:journl:halshs-01138432
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01138432
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    References listed on IDEAS

    as
    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Corbo, Vittorio & Landerretche, Oscar & Schmidt-Hebbel, Klaus, 2001. "Assessing Inflation Targeting after a Decade of World Experience," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 343-368, October.
    3. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    4. Chrigui, Zouhair & Boujelbene, Younes & Mhamdi, Ghrissi, 2011. "Central Bank independence and inflation: Evidence from emerging countries," Journal of Policy Modeling, Elsevier, vol. 33(3), pages 453-469, May.
    5. Ghrissi Mhamdi, 2013. "Stability Of Money Demand Function In Tunisia," Post-Print halshs-01138431, HAL.
    6. Iris Claus, 1997. "A Measure of Underlying Inflation in the United States," Staff Working Papers 97-20, Bank of Canada.
    7. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-261, March.
    8. 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.
    9. mhamdi, ghrissi, 2009. "Evaluation du degré d’indépendance de la Banque Centrale de Tunisie [Independence degree of Tunisian central bank]," MPRA Paper 63671, University Library of Munich, Germany.
    10. Stephen G. Cecchetti, 1997. "Central Bank Policy Rules: Conceptual Issues and Practical Considerations," NBER Working Papers 6306, National Bureau of Economic Research, Inc.
    11. Vittorio Corbo, 1998. "Reaching One-Digit Inflation: The Chilean Experience," Journal of Applied Economics, Universidad del CEMA, vol. 1, pages 123-163, November.
    12. mhamdi, ghrissi, 2012. "Determinants of Inflation in Tunisia Using Structural Modeling," MPRA Paper 63479, University Library of Munich, Germany.
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    More about this item

    Keywords

    monetary policy in Tunisia; Inflation; core inflation; VAR;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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