Monetary Regimes and Core Inflation
37 Pages Posted: 5 Feb 2004
Date Written: October 2003
Abstract
This paper examines the interaction of core inflation and monetary policy. Interest in core has grown because of inflation targeting. Core inflation is defined in numerous ways giving rise to many potential measures; I define core inflation as the best forecaster of inflation. A cross-country study finds that core inflation differs across monetary regimes. A theoretical model shows that in an accommodative regime lagged inflation is core inflation and in a non-accommodative regime, such as strict inflation targeting, the trimmed mean is core. Using unconditional regressions I find that the theoretical model holds empirically. Through conditional regressions, inflation expectations are found to be consistent with the accommodativeness of the central bank.
Keywords: Core inflation, Inflation targeting
JEL Classification: E52, E31, E58
Suggested Citation: Suggested Citation
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