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Abstract:

Econometrics Paper
Measuring Core Inflation (Now published in Economic Journal, vol. 105, No. 432 (September 1995), pp.1130-1144.)
Danny Quah and Shaun P. Vahey  1995
Paper No' EM/1995/282:


Tags: core inflation; vector autoregression; dynamic restrictions

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.