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A statistical measure of core inflation

  • Meyler, Aidan

This paper examines alternative statistically-based measures of core inflation in Ireland over the period 1976-1999. A highly disaggregated (approximately 500 price series) dataset from the Irish HICP is used. The distribution of quarterly price changes is shown, in common with other international studies, to be highly kurtotic (i.e., fat-tailed) and right skewed. This would suggest there is considerable ‘statistical noise’ in the measured inflation rate, motivating the use of ‘limited influence’ estimators of central tendency over the mean measure on the grounds of statistical efficiency. It is found that even a relatively small amount of trim from both ends of the distribution of price changes results in considerable improvement in root mean square error (RMSE) relative to a benchmark measure of core inflation. This improvement is even larger when monthly data are examined.

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File URL: http://mpra.ub.uni-muenchen.de/11362/1/MPRA_paper_11362.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11362.

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Date of creation: Apr 1999
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Publication status: Published in Central Bank and Financial Services Authority of Ireland Technical Paper Series 2/RT/1999.1999(1999): pp. 1-43
Handle: RePEc:pra:mprapa:11362
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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. Meyler, Aidan & Kenny, Geoff & Quinn, Terry, 1998. "Forecasting irish inflation using ARIMA models," MPRA Paper 11359, University Library of Munich, Germany.
  3. Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers rdp9810, Reserve Bank of Australia.
  4. Mark A. Wynne, 1997. "Measuring short-run inflation for central bankers - commentary," Review, Federal Reserve Bank of St. Louis, issue May, pages 161-167.
  5. Stephen G. Cecchetti, 1996. "Measuring Short-Run Inflation for Central Bankers," NBER Working Papers 5786, National Bureau of Economic Research, Inc.
  6. Danny Quah & Shaun Vahey, 1995. "Measuring Core Inflation," Bank of England working papers 31, Bank of England.
  7. Christine Gartner & Gert Wehinger, 1998. "Core Inflation in Selected European Union Countries," Working Papers 33, Oesterreichische Nationalbank (Austrian Central Bank).
  8. K.W. Clements & H.Y. Izan, 1987. "The Measurement of Inflation: A stochastic approach," Economics Discussion / Working Papers 87-02, The University of Western Australia, Department of Economics.
  9. Ball, L. & Mankiw, G.H., 1992. "Relative-Price Change as Aggregate Supply Shocks," Harvard Institute of Economic Research Working Papers 1609, Harvard - Institute of Economic Research.
  10. Thérèse Laflèche, 1997. "Statistical measures of the trend rate of inflation," Bank of Canada Review, Bank of Canada, vol. 1997(Autumn), pages 29-47.
  11. Nathan S. Balke & Mark A. Wynne, 1996. "Supply shocks and the distribution of price changes," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 10-18.
  12. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient Inflation Estimation," NBER Working Papers 6183, National Bureau of Economic Research, Inc.
  13. 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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