Measuring Core Inflation

Michael F. Bryan and Stephen Cecchetti

No 4303, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, we investigate the use of limited-information estimators as measures of core inflation. Employing a model of asymmetric supply disturbances, with costly price adjustment, we show how the observed skewness in the cross-sectional distribution of inflation can cause substantial noise in the aggregate price index at high frequencies. The model suggests that limited-influence estimators, such as the median of the cross-sectional distribution of inflation, will provide superior short-run measures of core inflation. We document that our estimates of inflation have a higher correlation with past money growth and deliver improved forecasts of future inflation relative to the CPI. Moreover, unlike the CPI, the limited-influence estimators do not forecast future money growth, suggesting that monetary policy has often accommodated supply shocks that we measure as the difference between core inflation and the CPI. Among the three limited-influence estimators we consider - the CP1 excluding food and energy, the IS-percent trimmed mean, and the median - we find that the median has the strongest relationship with past money growth and provides the most accurate forecast of future inflation. Using the median and several other variables including nominal interest rates and M2, our best forecast is that in the absence of monetary accommodation of any future aggregate supply shocks, inflation will average roughly 3 percent per year over the next five years.

JEL-codes: E31 (search for similar items in EconPapers)
Date: 1993-03
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (81)

Published as N. Gregory Mankiw, ed., Monetary Policy, University of Chicago Press, 1994
Published as Measuring Core Inflation , Michael F. Bryan, Stephen G. Cecchetti. in Monetary Policy , Mankiw. 1994

Downloads: (external link)
http://www.nber.org/papers/w4303.pdf (application/pdf)

Related works:
Chapter: Measuring Core Inflation (1994)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4303

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w4303

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by (wpc@nber.org).