Modelling core inflation in Ukraine in 2003-2012

Novikova Natalia () and Volkov Dmitry ()

EERC Working Paper Series from EERC Research Network, Russia and CIS

Abstract: High volatility of Ukrainian inflation can partially be explained by large share of food and energy. The structure of Ukrainian CPI basket makes it difficult to distinguish between the underlining and temporary changes in inflation, which complicates the reaction of monetary policy. In this study we consider different measures of consumer price growth and examine moving to core inflation as an intermediate target for NBU monetary policy. We employ VEC framework to explore the difference between reaction of headline and core inflation to macro fundamentals in 2003-2012. Two approaches - exclusion-based method and trimmed mean – are used to construct alternative core indices. Although our estimation results do not allow making unambiguous choice of the inflation target for monetary policy in Ukraine, they suggest that core inflation should be monitored and used in communicating monetary policy decisions. We found that both headline and core inflation have high degree of persistence, fit well within the mark-up model, and that exchange rate pass-through is high in both cases. Meanwhile, core indices could help distinguish shocks coming from regulated prices and nominal wages.

JEL-codes: E31 E41 E52 (search for similar items in EconPapers)
Date: 2012-11-15
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Citations: View citations in EconPapers (1)

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