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Measuring Core Inflation

Danny Quah and Shaun P. Vahey
The Economic Journal
Vol. 105, No. 432 (Sep., 1995), pp. 1130-1144
Published by: Wiley on behalf of the Royal Economic Society
DOI: 10.2307/2235408
Stable URL: http://www.jstor.org/stable/2235408
Page Count: 15
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Measuring Core Inflation
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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 comovements 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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