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Core Inflation in Brazil. André Minella Tomiê Sugahara Research Department - Banco Central do Brasil VIII Annual Seminar August 2006 Work in Progress – Comments are Welcome. Motivation. Core inflation measures are used in most countries, but… Are core inflation measures really useful?

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core inflation in brazil

Core Inflation in Brazil

André Minella

Tomiê Sugahara

Research Department - Banco Central do Brasil

VIII Annual Seminar

August 2006

Work in Progress – Comments are Welcome

motivation
Motivation
  • Core inflation measures are used in most countries,

but…

  • Are core inflation measures really useful?
  • Do they convey information about “underlying” or future inflation?
  • How do core measures compare to each other?
  • Can new measures, such as those based on common factors, be useful?

Let’s take a look at what Brazil’s experience says…

literature
Literature
  • Brazil
    • Figueiredo (2001), Bryan and Cecchetti (2001)
    • Pichetti and Toledo (2000), Fiorencio and Moreira (2002), Moreira and Migon (2004), Araújo and Fiorencio (2005)
    • Gonçalves, Schechtman and Barros (2000)
  • Other countries
    • Hogan, Jonhson and Laflèche (2001), Armour (2006)
    • D’Amato, Sanz and Paladino (2006)
    • Cristadoro, Forni, Reichlin and Veronese (2005)
    • Bryan and Cecchetti (1994), Bryan, Cecchetti, and Wiggins II (1997)
    • Roger (1997, 1998)
presentation outline
Presentation outline
  • Core measures properties
  • Core measures for Brazil
    • Current measures
    • New measures
  • Evaluation
    • Variability
    • Bias
    • Capacity to indicate future inflation
core measures desirable properties
Core measures desirable properties
  • Practical issues
    • Timely computable
    • Definite figures (not revisable)
    • Easily understood by the public
  • Substantial issues
    • Reflects “underlying” inflation
    • Forward-looking nature
core measures in brazil ipca index
Core measures in BrazilIPCA index
  • By exclusion
    • Food at home and administered prices are excluded (around 50% of the index)
  • Trimmed mean (non-smoothed)
    • 20% of each tail of weighted distribution is excluded
    • Distribution: Monthly change of IPCA items (47 items up to 1999:7; 52 items 1999:8-2006:6)
core measures in brazil ipca index11
Core measures in BrazilIPCA index
  • Smoothed trimmed mean
    • For 8 items, y-o-y change instead of m-o-m
  • Asymmetric trimmed mean
    • Bryan and Cecchetti (2001)
    • Centered on the 60th percentile of the weighted distribution
    • 24% cutoff:
      • 14.4% in the bottom tail
      • 9.6% in the upper tail
core measures in brazil ipca index14
Core measures in BrazilIPCA index
  • Weighted median
    • Value of the 50th percentile of the weighted distribution
  • Double weighted
    • All items are considered, but they are reweighted according to their volatility: the greater the volatility, the lower the weight
core measures in brazil core based on common factors
Core measures in BrazilCore based on common factors
  • Based onCristadoro, Forni, Reichlin and Veronese (2005), index for the Euro Area
  • Use information of a large panel of time series
  • Inflation driven by common factors
  • Core measure: projection of the medium- and long-run component of monthly inflation on the common factors
core measures in brazil core based on common factors17
Core measures in BrazilCore based on common factors

Inflation modeled as:

Core measure:

core measures in brazil core based on common factors18
Core measures in BrazilCore based on common factors

Panel of 106 series

  • Prices
  • Economic activity
  • Money, credit, and financial variables
  • Fiscal sector
  • External sector
  • International economy
conclusions up to this point
Conclusions (up to this point)
  • Core measures:
    • are less volatile than headline inflation
    • contain information on future inflation
    • but some of them are biased downwards
  • Although results are mixed, Figueiredo’s (2001) result as to the relatively good performance of smoothed trimmed-mean core measure is held
  • Core based on common factors may be promising, but too early to tell - additional research is warranted
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