Choosing between alternative measures of core inflation using bounded rationality and cognitive biases

Elena Pelinescu and Andrei Silviu Dospinescu
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Elena Pelinescu: Institute for Economic Forecasting, Romanian Academy, Bucharest
Andrei Silviu Dospinescu: Centre for Industrial Economics and Services, Romanian Academy, Bucharest

Revista de Economie Industriala, 2008, vol. 6, issue 1, pages 42-52

Abstract: The paper intends to synthetically present a possible use of bounded rationality and cognitive biases in the evaluation of different core inflation measurements. As a consequence, the paper starts by synthetically presenting the main approaches to computing core inflation. We continue by analyzing the concept of bounded rationality and cognitive biases and their possible use in understanding the movement in different prices. The paper computes different measures of core inflation using methods based on excluding certain categories of prices from overall inflation rate and methods based on excluding from the overall inflation rate temporary movements of various prices which on different moments register extremely high volatility (using trimmed methodology). We analyze the impact of bounded rationality and cognitive biases on the movement of different prices and we suggest criteria for choosing between different measurement of core inflation and for computing a compound measurement of core inflation which takes into account the manifestation of cognitive biases. The natural continuation of the analysis will be to conduct an experiment which will allow us to quantitatively measure the impact of cognitive biases and consequently to determine the weights used in constructing the compound core inflation measurement.

Keywords: core inflation; price stability; methods of computation; bounded rationality; cognitive biases (search for similar items in EconPapers)
JEL-codes: E31 E37 C53 P22 (search for similar items in EconPapers)

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