A policy-sensible benchmark core inflation measure

Stefano Siviero and Giovanni Veronese

Oxford Economic Papers, 2011, vol. 63, issue 4, 648-672

Abstract: Core or underlying inflation indicators feature prominently in the economic debate and in internal and external policy discussions of central banks. Notwithstanding this popularity the role of core inflation measures in the monetary policy-making process is questionable since most of these measures are based exclusively on statistical criteria without any theoretical justification. In this paper we propose an approach to building a benchmark measure of core inflation that explicitly treats core inflation as an artificial concept whose usefulness rests exclusively with its use in improving monetary policy effectiveness. Using this measure, constructed on the basis of the solution to a standard optimal monetary policy problem, we assess the performance and policy usefulness of other, popular core inflation indicators. Our approach is illustrated by means of two applications to euro-area and US data. Copyright 2011 Oxford University Press 2011 All rights reserved, Oxford University Press.

Date: 2011
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