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Measures of Trend Inflation in Hong Kong

Listed author(s):
  • Frank Leung

    (Research Department, Hong Kong Monetary Authority)

  • Kevin Chow

    (Research Department, Hong Kong Monetary Authority)

  • Simon Chan

    (Research Department, Hong Kong Monetary Authority)

The concept of trend inflation is crucial for macroeconomic analysis and policy formulation by central banks. In this paper, we compare measures of trend inflation in Hong Kong estimated by the exclusion and statistical methods. Our findings suggest that the trend inflation estimated by the exclusion method (by excluding basic food, energy and other volatile items) and the principal component technique have strong predictive power on future changes in headline CPI or PCE inflation. Evaluation results based on qualitative and quantitative criteria suggest that the two estimation methods have their own strengths and weaknesses, and none of the methods has clear absolute advantage over the other for measuring trend inflation.

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File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP09_07_full.pdf
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Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0907.

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Length: 31 pages
Date of creation: Apr 2009
Handle: RePEc:hkg:wpaper:0907
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  1. Robalo Marques, Carlos & Duarte Neves, Pedro & Morais Sarmento, Luis, 2003. "Evaluating core inflation indicators," Economic Modelling, Elsevier, vol. 20(4), pages 765-775, July.
  2. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
  3. Cogley, Timothy, 2002. "A Simple Adaptive Measure of Core Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 94-113, February.
  4. Pedro Duarte Neves & Carlos Robalo Marques & Afonso Gonçalves da Silva, 2001. "Using the first principal component as a core inflation indicator," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  5. Robert W. Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
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