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Evaluation of Wavelet-based Core Inflation Measures: Evidence from Peru

Author

Listed:
  • Erick Lahura

    (Departamento de Economía - Pontificia Universidad Católica del Perú
    Banco Central de la Reserva del Perú)

  • Marco Vega

    (Departamento de Economía - Pontificia Universidad Católica del Perú
    Banco Central de la Reserva del Perú)

Abstract

Under inflation targeting and other related monetary policy regimes, the identication of non-transitory inflation and forecasts about future inflation constitute key ingredients for monetary policy decisions. In practice, central banks perform these tasks using so-called "core inflation measures". In this paper we construct alternative core inflation measures using wavelet functions and multiresolution analysis (MRA), and then evaluate their relevance for monetary policy. The construction of wavelet-based core inflation measures (WIMs) is relatively new in the literature and their assessment has not been addressed formally, this paper being the first attempt to perform both tasks for the case of Peru. Another main contribution of this paper is that it proposes two alternative criteria for evaluating core inflation measures: (i) a VAR-based long-run criterion, and (ii) forecast-based criteria. Evidence from Peru shows that WIMs are superior in terms of long-run performance, and that they could improve short-term (up-to-6-months) inflation forecasts.

Suggested Citation

  • Erick Lahura & Marco Vega, 2011. "Evaluation of Wavelet-based Core Inflation Measures: Evidence from Peru," Documentos de Trabajo / Working Papers 2011-320, Departamento de Economía - Pontificia Universidad Católica del Perú.
    • Handle: RePEc:pcp:pucwps:wp00320
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    File URL: http://files.pucp.edu.pe/departamento/economia/DDD320.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Core inflation; wavelets; forecast; structural VAR;
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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