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Measuring core inflation

By Danny Quah and Shaun P Vahey

Abstract

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-movement in inflation and output. We construct a measure of core inflation by placing dynamic restrictions on a vector autoregression (VAR) system

Topics: HB Economic Theory
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Year: 1995
OAI identifier: oai:eprints.lse.ac.uk:2090
Provided by: LSE Research Online
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