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Design and Evaluation of Core Inflation Measures for Turkey

  • Oguz Atuk
  • Mustafa Utku Ozmen

This study analyzes core inflation concept for Turkey from the perspective of design and evaluation. To our best knowledge, this is the first study to evaluate the performance of the core inflation measures for Turkey. We first define and calculate new core inflation indicators using the disaggregated price data for the time period of January 1994 to June 2007. The core inflation measures developed in this paper include weighted median, trimmed mean and volatility-based measures along with the permanent exclusion-based methods. Later, we evaluate the performance of the core inflation measures with regards to pre-defined criteria including unbiasedness, reduced volatility, trend tracking ability and predictive ability. Considering the significant shift in the inflation process in Turkey, we split the sample into two as pre- and post-2003 when evaluating the performance of the core inflation measures. Overall, no single core inflation indicator stands out alone as “the core” and therefore different core measures should be followed simultaneously to get a better understanding of the real trend of inflation and to identify various shocks hitting the inflation. However, limited influence estimators and volatility-based core measures perform relatively better compared to permanent exclusion-based methods. The study also provides an extensive analysis of the distribution of price changes at various aggregation levels.

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File URL: http://www.tcmb.gov.tr/wps/wcm/connect/fc986630-3e49-45b2-8a65-de73054cf446/WP0903ENG.pdf?MOD=AJPERES&CACHEID=fc986630-3e49-45b2-8a65-de73054cf446
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Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 0903.

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Date of creation: 2009
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Handle: RePEc:tcb:wpaper:0903
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  1. Riccardo Cristadoro & Mario Forni & Lucrezia Reichlin & Giovanni Veronese, 2005. "A core inflation indicator for the Euro area," ULB Institutional Repository 2013/10131, ULB -- Universite Libre de Bruxelles.
  2. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand.
  3. Alexandra Heath & Ivan Roberts & Tim Bulman, 2004. "Inflation in Australia: Measurement and Modelling," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
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  5. Hasan Bakhshi & Tony Yates, 1999. "To trim or not to trim? An application of a trimmmed mean inflation estimator to the United Kingdom," Bank of England working papers 97, Bank of England.
  6. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
  7. Michael F. Bryan & Stephen G. Cecchetti, 1996. "Inflation and the Distribution of Price Changes," NBER Working Papers 5793, National Bureau of Economic Research, Inc.
  8. Robert Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
  9. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-61, March.
  10. Jim Dolmas, 2005. "Trimmed mean PCE inflation," Working Papers 0506, Federal Reserve Bank of Dallas.
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  12. Todd E. Clark, 2001. "Comparing measures of core inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-31.
  13. Domenico Giannone & Troy Matheson, 2006. "A new core inflation indicator for New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2006/02, Reserve Bank of New Zealand.
  14. Thérèse Laf;èche & Jamie Armour, 2006. "Evaluating Measures of Core Inflation," Bank of Canada Review, Bank of Canada, vol. 2006(Summer), pages 19-29.
  15. Joanne Cutler, 2001. "Core Inflation in the UK," Discussion Papers 03, Monetary Policy Committee Unit, Bank of England.
  16. Pedro Duarte Neves & Luís Morais Sarmento & Carlos Robalo Marques, 1999. "Evaluating core inflation indicators," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  17. François R. Velde, 2006. "An alternative measure of inflation," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 56-65.
  18. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Working Papers 06-10, Bank of Canada.
  19. Thérèse Laflèche, 1997. "Statistical measures of the trend rate of inflation," Bank of Canada Review, Bank of Canada, vol. 1997(Autumn), pages 29-47.
  20. Smith, Julie K, 2004. "Weighted Median Inflation: Is This Core Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 253-63, April.
  21. Pietro Catte & Torsten Sløk, 2005. "Assessing the value of indicators of underlying inflation for monetary policy," OECD Economics Department Working Papers 461, OECD Publishing.
  22. Scott Roger, 2000. "Relative Prices, Inflation and Core Inflation," IMF Working Papers 00/58, International Monetary Fund.
  23. Vega, Juan Luis & Wynne, Mark A., 2001. "An evaluation of some measures of core inflation for the euro area," Working Paper Series 0053, European Central Bank.
  24. Morana, Claudio, 2000. "Measuring core inflation in the euro area," Working Paper Series 0036, European Central Bank.
  25. Francisco Marcos Rodrigues Figueiredo, 2001. "Evaluating Core Inflation Measures for Brazil," Working Papers Series 14, Central Bank of Brazil, Research Department.
  26. Julie Smith, 2005. "Inflation targeting and core inflation," Canadian Journal of Economics, Canadian Economics Association, vol. 38(3), pages 1018-1036, August.
  27. Mick Silver, 2007. "Core Inflation: Measurement and Statistical Issues in Choosing Among Alternative Measures," IMF Staff Papers, Palgrave Macmillan, vol. 54(1), pages 163-190, May.
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