Evaluation of Wavelet-based Core Inflation Measures: Evidence from Peru

Erick Lahura and Marco Vega

No 2011-320, Documentos de Trabajo / Working Papers from Departamento de Economía - Pontificia Universidad Católica del Perú

Abstract: Under inflation targeting and other related monetary policy regimes, the identication of non-transitory inflation 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 two alternative criteria for evaluating core inflation measures: (i) a VAR-based long-run criterion, and (ii) forecast-based criteria. Evidence from Peru shows that WIMs are superior in terms of long-run performance, and that they could improve short-term (up-to-6-months) inflation forecasts.

Keywords: Core inflation; wavelets; forecast; structural VAR (search for similar items in EconPapers)
JEL-codes: C45 E31 E37 E52 (search for similar items in EconPapers)
Pages: pages
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
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