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 co-movements in inflation and output. We construct a measure of core inflation by placing dynamic restrictions on a vector autoregression (VAR) system.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1153.
Find related papers by JEL classification: C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
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