Measuring Core Inflation

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 01 April 1995

Staff working paper No. 31
By Danny T Quah and Shaun P Vahey

In this paper, we argue that measured (RPI) inflation is conceptually mismatched with core inflation: the difference is more than just "measurement error". We propose a technique for measuring core inflation, based on an explicit long-run economic hypothesis. Core inflation is defined as that component of measured inflation that has no (medium to) long-run impact on real output-a notion that is consistent with the vertical long-run Phillips curve interpretation of the comovements in inflation and output. We construct a measure of core inflation by placing dynamic restrictions on a vector autoregression (VAR) system.

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