U.S. Core Inflation: A Wavelet Analysis

Cotter, John and Dowd, Kevin (2006): U.S. Core Inflation: A Wavelet Analysis.

Abstract

This paper proposes the use of wavelet methods to estimate U.S. core inflation. It explains wavelet methods and suggests they are ideally suited to this task. Comparisons are made with traditional CPI-based and regression-based measures for their performance in following trend inflation and predicting future inflation. Results suggest that wavelet-based measures perform better, and sometimes much better, than the traditional approaches. These results suggest that wavelet methods are a promising avenue for future research on core inflation.

• Item Type: MPRA Paper
• Institution: University College Dublin
• Language: English
• Keywords: core inflation; wavelets; trend inflation; inflation prediction
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E47 - Forecasting and Simulation: Models and Applications

References

Álvarez, L. J., and M. Llanos (1999) “Underlying inflation measures in Spain.” Proceedings of the Bank for International Settlements Workshop on Measures of Underlying Inflation and their Role in the Conduct of Monetary Policy. Available at http://www.bis.org/publ/bisp05_p6.pdf Apel, M.., and P. Jansson (1999) “A parametric approach for estimating core inflation and interpreting the inflation process.” Proceedings of the Bank for International Settlements Workshop on Measures of Underlying Inflation and their Role in the Conduct of Monetary Policy. Available at http://www.bis.org/publ/bisp05_p2.pdf Blinder, A. S. (1997) “Commentary.” Federal Reserve Bank of St. Louis Review (May-June 1997): 157-160. Bryan, M. F., and S. G. Cecchetti (1993) “The consumer price index as a measure of inflation.” Federal Reserve Bank of Cleveland Economic Review (1993:4): 15-24. Bryan, M. F., and S. G. Cecchetti (1994) “Measuring core inflation”. Pp. 195-215 in N. Gregory Mankiw (ed.) Monetary Policy. Chicago: Chicago University Press. Bryan, M. F., S. G. Cecchetti, and R. L. Wiggins, III (1997) “Efficient inflation estimation.” NBER Working Paper No. 6183. Cecchetti, S. G. (1997) “Measuring short-run inflation for central bankers.” Federal Reserve Bank of St. Louis Review (May-June 1997): 143-155. Clark, T. E. (2001) “Comparing measures of core inflation.” Federal Reserve Bank of Kansas City Economic Review (Second Quarter 2001): 5-31. 32 Cogley, T. (2002) “A simple adaptive measure of core inflation.” Journal of Money, Credit, and Banking 34: 94-113. Coifman, R. R., and D. Donoho (1995) “Time-invariant wavelet denoising.” In Wavelets and Statistics, Pp 125-150 in A. Antoniadis and G. Oppenheim (eds.) Volume 103 of Lecture Notes in Statistics, Springer-Verlag, New York. Cockerell, L., (1999) “Measures of inflation and inflation targeting in Australia” Proceedings of the Bank for International Settlements Workshop on Measures of Underlying Inflation and their Role in the Conduct of Monetary Policy. Available at http://www.bis.org/publ/bisp05_p5.pdf Daubechies, I. (1992) “Ten Lectures on Wavelets.” Volume 61 of CBMS-NSF Regional Conference Series in Applied Mathematics, Society for Industrial and Applied Mathematics, Philadelphia. Eckstein, O. (1981) Core Inflation. Englewood-Cliffs, NJ: Prentice-Hall. Freeman, D. G. (1998) “Do core inflation measures help forecast inflation?” Economics Letters 58: 143-147. Gabor, D. (1946) “Theory of communication.” Journal of the Institute of Electrical Engineers, 93: 429-457. Gençay, R., F. Selçuk, and B. Whitcher (2002) An Introduction to Wavelets and Other Filtering Methods in Economics and Finance. San Diego: Academic Press. Hogan, S., M. Johnson, and T. Laflèche (2001) “Core inflation”. Bank of Canada Technical Report No. 89. 33 Jensen, M. (1999) “Using wavelets to obtain a consistent ordinary least squares estimator of the long-memory parameter.” Journal of Forecasting, 18: 17-32. Johnson, M., (1999) “Core inflation: a measure of inflation for policy purposes.” Proceedings of the Bank for International Settlements workshop on Measures of Underlying Inflation and their Role in the Conduct of Monetary Policy. Available at http://wb-cu.car.chula.ac.th/Papers/bis/inflation04.pdf Mallat, S. (1989) “A theory of multiresolution signal decomposition: the wavelet representation.” IEEE Transactions on Pattern Analysis and Machine Intelligence, 11: 674-693. Marques, C. R., P. D. Neves, and L. M. Sarmento (2000) “Evaluating core inflation indicators.” Banco de Portugal Working Paper 3-00. Misiti, M., Y. Misiti, G. Oppenheim, and J.-M. Poggi (2000) Wavelet Toolbox for Use with MATLAB. Natick, MA: The MathWorks, Inc. Quah, D., and S. P. Vahey (1995) “Measuring core inflation.” Economic Journal 105: 1130-1144. Ramsey, J. B., and Z. Zhang (1997) “The analysis of foreign exchange data using waveform dictionaries.” Journal of Empirical Finance 4: 341-372. Ramsey, J. B., and Lampart, C. (1998) “The decomposition of economic relationships by time scale using wavelets: money and income.” Macroeconomic Dynamics, 2: 49-71. 34 Ramsey, J. B., (1999) “The contribution of wavelets to the analysis of economic and financial data.” Philosophical Transactions of the Royal Society of London A 357: 2593-2606. Rich, R., and C. Steindel, (2005) “A Review of Core Inflation and an Evaluation of Its Measures”, Federal Reserve Bank of New York, Staff Report No. 236. Roger, S. (1998) “Core inflation: concepts, uses and measurement.” Mimeo. Reserve Bank of New Zealand. Roughan, M., D. Veitch and P. Abry (2000) “Real-time estimation of the parameters of long-range dependence.” IEEE/ACM Transactions on Networking. 8: 467-478. Schleicher, C. (2002) “An introduction to wavelets for economists.” Bank of Canada Working Paper No. 2002-3. Smith, J. K. (2004) “Weighted median inflation: Is this core inflation?” Journal of Money, Credit, and Banking. 36: 253-263. Smith, J. K. (2006) “PCE Inflation and Core Inflation?” SSRN http://ssrn.com/abstract=891142. Stevenson, M. (2001) “Filtering and forecasting spot electricity prices in the increasingly deregulated Australian electricity market.” University of Technology, Sydney, Quantitative Finance Research Papers No. 63. Vega, J.-L., and M. A. Wynne (2001) “An evaluation of the some measures of core inflation for the euro area.” European Central Bank Working Paper No. 53. Wynne, M. A. (1997) “Commentary”. Federal Reserve Bank of St. Louis Review (May-June 1997): 161-167. 35 Wynne, M. A. (1999) “Core inflation: A review of some conceptual issues.” European Central Bank Working Paper Number 5.5. Wynne, M. A. (2001) “The Edgeworth index as a measure of core inflation.” Mimeo. Federal Reserve Bank of Dallas.