Working Paper: CEPR ID: DP6469
Authors: Domenico Giannone; Troy Matheson
Abstract: This paper introduces a new indicator of core inflation for New Zealand, estimated using a dynamic factor model and disaggregate consumer price data. Using disaggregate consumer price data we can directly compare the predictive performance of our core indicator with a wide range of other ?core inflation? measures estimated from disaggregate consumer prices, such as the weighted median and the trimmed mean. The medium term inflation target of Reserve Bank of New Zealand is used as a guide to define our target measure of core inflation - a centered 2 year moving average of past and future inflation outcomes. We find that our indicator produces relatively good estimates of this characterisation of core inflation when compared with estimates derived from a range of other models.
Keywords: core inflation; monetary policy
JEL Codes: C32; E31; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| core inflation indicator (E31) | underlying inflation trends (E31) |
| core inflation indicator (E31) | predicting future inflation changes (E31) |
| current gap between core inflation and headline inflation (E31) | future changes in headline inflation (E31) |
| core inflation indicator (E31) | volatility compared to other measures (C58) |
| core inflation indicator (E31) | alignment with medium-term inflation target (E61) |
| core inflation indicator (E31) | correlation with target measure (C52) |