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Estimating Core Inflation - The Role of Oil Price Shocks and Imported Inflation

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This paper calculates core inflation, by imposing long run restrictions on a structural vector autoregression (VAR) model containing the growth rate of output, inflation and oil prices. Core inflation is identified as that component in inflation that has no long run effect on output. No restrictions are placed on the response of output and inflation to the oil price shocks. The analysis is applied to Norway and the United Kingdom, both oil producing OECD countries. A model that distinguishes between domestic and imported inflation, is also specified for Norway. In both countries, core inflation is a prime mover of CPI (RPI) inflation. However, CPI (RPI) inflation overvalues or undervalues core inflation in many periods, of which oil price shocks are important sources behind this deviation for prolonged periods

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  • Hilde Christiane Bjørnland, 1997. "Estimating Core Inflation - The Role of Oil Price Shocks and Imported Inflation," Discussion Papers 200, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:200
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    1. Sudarso Kaderi Wiryono & Oktofa Yudha Sudrajad & Eko Agus Prasetio & Marla Setiawati, 2020. "Do Oil Price Shocks Give Impact on Financial Performance of Manufacturing Sectors in Indonesia?," International Journal of Energy Economics and Policy, Econjournals, vol. 10(5), pages 510-514.
    2. Landau, Bettina, 2000. "Core inflation rates: a comparison of methods based on west German data," Discussion Paper Series 1: Economic Studies 2000,04, Deutsche Bundesbank.
    3. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Staff Working Papers 06-10, Bank of Canada.
    4. Hilde C. Bjørnland, 1998. "Economic Fluctuations in a Small Open Economy - Real versus Nominal Shocks," Discussion Papers 215, Statistics Norway, Research Department.
    5. Gert Wehinger, 2000. "Causes of Inflation in Europe, the United States and Japan: Some Lessons for Maintaining Price Stability in the EMU from a Structural VAR Approach," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 27(1), pages 83-107, March.
    6. Nazim Hajiyev & Ali Rustamov, 2019. "How Oil Price Drops are Reflected by Imported Inflation in Azerbaijan?," International Journal of Energy Economics and Policy, Econjournals, vol. 9(2), pages 182-193.
    7. Seamus Hogan & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
    8. Mark S Astley & Tony Yates, 1999. "Inflation and real disequilibria," Bank of England working papers 103, Bank of England.

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    More about this item

    Keywords

    Core inflation; inflation target; long-run neutrality; oil price shocks; imported inflation; structural VAR.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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