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Core Inflation and Inflation Targeting in a Developing Economy

Author

Listed:
  • Luis A. Rivas

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

Abstract

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.

Suggested Citation

  • Luis A. Rivas, 2002. "Core Inflation and Inflation Targeting in a Developing Economy," Vanderbilt University Department of Economics Working Papers 0207, Vanderbilt University Department of Economics, revised Sep 2003.
  • Handle: RePEc:van:wpaper:0207
    as

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    File URL: http://www.accessecon.com/pubs/VUECON/vu02-w07.pdf
    File Function: First version, 2002 revised version 2003-05
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    More about this item

    Keywords

    Core inflation; developing economies; forecasting; monetary policy; price index; tiem-series;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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