Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) LSE RSS Contact Us YouTube Twitter


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.