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Core Inflation and Inflation Targeting in a Developing Economy

  • Luis A. Rivas

    (Department of Economics, Vanderbilt University and Banco Central de Nicaragua)

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    This paper is concerned with inflation targeting as a potential monetary policy objective in a developing economy. Using data from Nicaragua, it first studies the extent to which the Consumer Price Index (CPI) could be used to formulate short-run inflation targets. It is found that due to the particular cross-sectional properties of the relative-price distributions, the rate of change in the CPI may not be the best index for this purpose. As a consequence, the paper is also concerned with the choice of alternative indicators of inflation and their statistical properties. These alternative measures are ranked according to their ability to forecast the rate of change in the price level. Finally, the relationship between the dispersion and skewness of the relative-price distribution and generalized inflation is studied using time series analysis.

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    File URL: http://www.accessecon.com/pubs/VUECON/vu02-w07.pdf
    File Function: First version, 2002 revised version 2003-05
    Download Restriction: no

    Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0207.

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    Date of creation: May 2002
    Date of revision: Sep 2003
    Handle: RePEc:van:wpaper:0207
    Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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    8. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The Consumer Price Index as a Measure of Inflation," NBER Working Papers 4505, National Bureau of Economic Research, Inc.
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    18. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
    19. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
    20. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
    21. Janet Currie & Jonathan Gruber, 1995. "Health Insurance Eligibility, Utilization of Medical care, and Child Health," NBER Working Papers 5052, National Bureau of Economic Research, Inc.
    22. Vogelsang, Timothy J., 1997. "Wald-Type Tests for Detecting Breaks in the Trend Function of a Dynamic Time Series," Econometric Theory, Cambridge University Press, vol. 13(06), pages 818-848, December.
    23. Mark A. Wynne, 1997. "Measuring short-run inflation for central bankers - commentary," Review, Federal Reserve Bank of St. Louis, issue May, pages 161-167.
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    25. Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September.
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