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What drives core inflation? A dynamic factor model analysis of tradable and nontradable prices

I develop a new estimate of core inflation for New Zealand and Australia based on a dynamic factor model. By using an over-identification restriction, the factors of the model are classified as tradable and nontradable factors. This innovation allows us to examine the relative contributions of tradable and nontradable prices towards core inflation. The results show that core inflation in both countries is primarily driven by the nontradable factor. The nontradable factor also explains significantly more of the variance in headline inflation relative to the tradable factor. Finally, both the tradable and nontradable factors show similar profiles across both countries suggesting common drivers.

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File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/2010/dp10_13.pdf
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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2010/13.

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Length: 35 p.
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:nzb:nzbdps:2010/13
Contact details of provider: Postal: P.O. Box 2498, Wellington
Phone: 64 4 471-3767
Fax: 64 4 471-2270
Web page: http://www.rbnz.govt.nz
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  1. Cristadoro, Riccardo & Forni, Mario & Reichlin, Lucrezia & Veronese, Giovanni, 2005. "A Core Inflation Indicator for the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 539-60, June.
  2. Emanuel Moench & Serena Ng & Simon Potter, 2009. "Dynamic hierarchical factor models," Staff Reports 412, Federal Reserve Bank of New York.
  3. Riccardo Cristadoro & Mario Forni & Lucrezia Reichlin & Giovanni Veronese, 2001. "A core inflation index for the euro area," Temi di discussione (Economic working papers) 435, Bank of Italy, Economic Research and International Relations Area.
  4. Viv Hall & Kunhong Kim & Robert Buckle, 1998. "Pacific rim business cycle analysis: Synchronisation and volatility," New Zealand Economic Papers, Taylor & Francis Journals, vol. 32(2), pages 129-159.
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