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Core Inflation Measures in New Zealand
Daniel Griffiths
27–29 May 2009
Ottawa Group Meeting: Neuchâtel
Core Inflation Measures in New Zealand Daniel Griffiths 2729 May - - PowerPoint PPT Presentation
Core Inflation Measures in New Zealand Daniel Griffiths 2729 May - - PowerPoint PPT Presentation
Core Inflation Measures in New Zealand Daniel Griffiths 2729 May 2009 Ottawa Group Meeting: Neuchtel Monetary backdrop to core inflation Inflation targeting Reserve Bank Act (1989) Policy Targets Agreement (PTA) Policy Targets
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Policy Targets Agreements
Defines the target of monetary policy
- Stabilisation of the ‘general level of prices’
Specification and measurement of price stability
- Monitored via a range of price indexes
Important element in monetary policy transparency and accountability
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Target measures of inflation
Housing adjusted price index ‘Underlying inflation’ CPI less credit services CPI all groups Other considerations to the target
- Avoiding instability in output, exchange rates
and interest rates
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Caveats within the PTA
Natural disaster Significant changes in terms of trade Changes in:
- direct and indirect taxes
- government and local body charges
Move towards more general approach
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Desirable qualities of core inflation measures
Robust and unbiased – efficient in distinguishing between persistent and transitory inflation, and not be biased relative to the target measure of inflation Timely Credible Verifiable
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Other properties of core inflation
Simple Picks up persistent changes in inflation Leads or coincides with measured inflation Smooth Low prediction error for measured inflation
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Measures of core inflation
Exclusion-based approaches Decomposition measures Statistical measures
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Exclusion-based measures
Classification-based measures Exclusion of volatile components Exclusion based on economic priors Criticisms of exclusion-based measures
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Consumers Price Index
CPI all groups, food, petrol, and household energy
Base: December 1998 quarter (=1000)
D 98 M 99 J S D M 00 J S D M 01 J S D M 02 J S D M 03 J S D M 04 J S D M 05 J S D M 06 J S D M 07 J S D M 08 J S D 900 1100 1300 1500 1700 1900 2100 2300 2500 Index CPI all groups Food Household energy Petrol
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Decomposition measures
Tradables and non-tradables (domestically generated inflation) Central and local government charges Goods and services
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Statistical measures
Trimmed means Weighted percentiles Double-weighted median Exponentially smoothed (ES)
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Trimmed means and weighted percentiles
Trimmed means (5, 10, 15, 20, 25, 30) Percentiles (10th, 25th, 50th, 75th, 90th) Choice of annual measure:
- Annual percentage change
- Compounding quarterly changes
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Stochastic theory and factor modelling
Where: the long-run component XL (core inflation) short-run component XS
) ,....., 1 )( , ( /
01 01 1
N n f p p
n n n
= = ε μ
jt jt jt
ε χ π + =
jt S jt L jt jt
ε χ χ π + + =
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Characteristics of core inflation candidates (ranked)
Source: Holden (2006)
Core measure Simple Picks up persistent changes in inflation Leads or coincident Unbiased Smooth Trimmed mean 1 3 1 1 3 ES measure 1 2 3 1 1 Factor model 3 1 1 1 2
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Consumers Price Index
Annual percentage change: all groups and core measures
D 00 M 01 J S D M 02 J S D M 03 J S D M 04 J S D M 05 J S D M 06 J S D M 07 J S D M 08 J S D 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Percent Exponentially smoothed Factor model 10 percent trimmed mean CPI all groups
Statistics New Zealand, Reserve Bank of New Zealand Sources:
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