Efficient Inflation Estimation

32 Pages Posted: 26 Aug 2000 Last revised: 29 Nov 2022

See all articles by Michael F. Bryan

Michael F. Bryan

Federal Reserve Bank of Cleveland; Federal Reserve Banks - Federal Reserve Bank of Atlanta

Stephen G. Cecchetti

National Bureau of Economic Research (NBER); Brandeis International Business School; Centre for Economic Policy Research (CEPR); European Systemic Risk Board

Rodney L. Wiggins, II

affiliation not provided to SSRN

Date Written: September 1997

Abstract

This paper investigates the use of trimmed means as high-frequency estimators of" inflation. The known characteristics of price change distributions, specifically the observation" that they generally exhibit high levels of kurtosis, imply that simple averages of price data are" unlikely to produce efficient estimates of inflation. Trimmed means produce superior estimates" of core inflation,' which we define as a long-run centered moving average of CPI and PPI" inflation. We find that trimming 9% from each tail of the CPI price-change distribution from the tails of the PPI price-change distribution, yields an efficient estimator of core inflation" for these two series, although lesser trims also produce substantial efficiency gains. Historically the optimal trimmed estimators are found to be nearly 23% more efficient (in terms of root-mean-square error) than the standard mean CPI Moreover, the efficient estimators are robust to sample period and to the definition of the" presumed underlying long-run trend in inflation.

Suggested Citation

Bryan, Michael F. and Cecchetti, Stephen G. and Cecchetti, Stephen G. and Wiggins, Rodney L., Efficient Inflation Estimation (September 1997). NBER Working Paper No. w6183, Available at SSRN: https://ssrn.com/abstract=225941

Michael F. Bryan

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101
United States

Federal Reserve Banks - Federal Reserve Bank of Atlanta

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Stephen G. Cecchetti (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Brandeis International Business School ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Systemic Risk Board ( email )

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Germany

Rodney L. Wiggins

affiliation not provided to SSRN