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The use of robust estimators as measures of core inflation

  • Luc Aucremanne

    ()

    (National Bank of Belgium, Research Department)

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    This paper examines robust estimators of core inflation for Belgian historical CPI data, and for euro area Harmonised Indices of Consumer Prices. Evidence of fat tails in the cross-sections of price changes is provided by traditional measures, as well as by a robust measure of the tail weights that is not vulnerable to the masking phenomenon. Trimmed means are considered in the first instance. We introduce a new estimator where the optimal trimming percentage is the lowest percentage for which the hypothesis of normality of the trimmed samples cannot be rejected on the basis of the Jarque-Bera statistic. Two variants are considered, one with a constant and one with a time-varying optimal trimming percentage. The latter has a higher breakdown point. Symmetric and asymmetric trimming are considered as well. Another robust estimator, the one-step Huber-type skipped mean, which is less vulnerable to the masking phenomenon, is also examined. It is shown that the robust estimators outperform the traditional core inflation measures found in the literature. However, as traditional measures, they lag rather than lead observed inflation. This was particularly so in the 70s and the 80s when the oil price shocks had substantial second-round effects on Belgian inflation.

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    File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp02.pdf
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    Paper provided by National Bank of Belgium in its series Working Paper Research with number 02.

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    Length: 76 pages
    Date of creation: Mar 2000
    Date of revision:
    Handle: RePEc:nbb:reswpp:200003-2
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    1. Michael F. Bryan & Stephen G. Cecchetti, 1999. "Inflation And The Distribution Of Price Changes," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 188-196, May.
    2. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins, 1997. "Efficient inflation estimation," Working Paper 9707, Federal Reserve Bank of Cleveland.
    3. Scott Roger, 1997. "A robust measure of core inflation in New Zealand, 1949-96," Reserve Bank of New Zealand Discussion Paper Series G97/7, Reserve Bank of New Zealand.
    4. Mio, Hitoshi & Higo, Masahiro, 1999. "Underlying Inflation and the Distribution of Price Change: Evidence from the Japanese Trimmed-Mean CPI," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(1), pages 103-132, May.
    5. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
    6. Laurence Ball & N. Gregory Mankiw, 1992. "Relative-Price Changes as Aggregate Supply Shocks," NBER Working Papers 4168, National Bureau of Economic Research, Inc.
    7. Oosterhoff, J., 1994. "Trimmed mean or sample median?," Statistics & Probability Letters, Elsevier, vol. 20(5), pages 401-409, August.
    8. Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers rdp9810, Reserve Bank of Australia.
    9. Scott Roger, 1998. "Core Inflation: Concepts, Uses and Measurement," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ24.
    10. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand.
    11. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, December.
    12. Bryan, Michael-F & Cecchetti, Stephen-G, 1999. "The Monthly Measurement of Core Inflation in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(1), pages 77-101, May.
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