Wavelet-based Core Inflation Measures: Evidence from Peru

Erick Lahura and Marco Vega

No 2011-019, Working Papers from Banco Central de Reserva del Perú

Abstract: Under inflation targeting and other related monetary policy regimes, the identification of non-transitory in ation and forecasts about future inflation constitute key ingredients for monetary policy decisions. In practice, central banks perform these tasks using so-called "core inflation measures". In this paper we construct alternative core inflation measures using wavelet functions and multiresolution analysis (MRA), and then evaluate their relevance for monetary policy. The construction of wavelet-based core inflation measures (WIMs) is relatively new in the literature and their assessment has not been addressed formally, this paper being the first attempt to perform both tasks for the case of Peru. Another main contribution of this paper is that it proposes a VAR-based long-run criterion as an alternative criteria for evaluating core inflation measures. Evidence from Peru shows that WIMs are superior to official core inflation in terms of both the proposed criterion and forecast-based criteria.

Keywords: Core infl ation; wavelets; forecast; structural VAR (search for similar items in EconPapers)
JEL-codes: C45 E31 E37 E52 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-cba, nep-for and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:rbp:wpaper:2011-019

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