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Estimators for IPCA core inflation

Estimators for IPCA core inflation. Francisco Marcos R. Figueiredo Roberta Blass Staub June 7 th , 2001 Research Department Central Bank of Brazil. 1 - Motivation. Relevant inflation for Central Bank Core inflation as a common indicator within Mercosur.

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Estimators for IPCA core inflation

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  1. Estimators for IPCA core inflation Francisco Marcos R. Figueiredo Roberta Blass Staub June 7th, 2001 Research Department Central Bank of Brazil

  2. 1 - Motivation • Relevant inflation for Central Bank • Core inflation as a common indicator within Mercosur

  3. 2 – Core inflation measures used by Central Banks

  4. 3 – Core inflation in Brazil • FGV - trimmed mean with smoothed components (IPC-BR) • IPEA - common trend of prices and smoothed trimmed mean • Pichetti & Toledo - dynamic factor index and asymmetric trimmed mean • Central Bank - trimmed mean with smoothed components

  5. 4 – Desired characteristics of a core measure • Timely computable • Forward looking nature • Good performance in description of the evolution of the inflation in the past • Easy understanding • Definitive • Theoretical base

  6. 5 – Statistical features of core inflation • Less volatile than the headline inflation • Long run stable relation with inflation • Inflation attractor (time precedence)

  7. 6 - Core inflation estimates • Exclusion method • Symmetric trimmed mean with smoothed series • Asymmetric trimmed mean

  8. 7 - Exclusion method • IPCA less food at home and administered prices • Excluded items amount 46% of IPCA basket

  9. 8 – Exclusion method Chart 1 - IPCA and exclusion core, Jan/96 through Apr/2001

  10. 9 – Symmetric Trimmed mean % (1-2)% %

  11. 10 - 20% Trimmed mean

  12. 11 – 20% Trimmed mean Chart 2 - IPCA and 20% trimmed-mean core, Jan/96 through Apr/2001

  13. 12 - Bryan & Cecchetti core • Bryan and Cecchetti (2001) • Asymmetric trimmed mean centered at 60th percentile • 24-month moving average • Optimal trims • 14.4% - lower tail • 9.6% - upper tail

  14. 13- Bryan & Cecchetti core Chart 3 -IPCA e Bryan & Cecchetti core , Jan/96 through Apr/2001

  15. 14 - Statistics of core inflation measures

  16. 15 - Granger causality tests • Exclusion core • does not cause IPCA • is caused by IPCA • Trimmed 20 core • causes IPCA ( 2 lags) • is not caused by IPCA • Bryan & Cecchetti core • causes IPCA • is not caused by IPCA

  17. Response of TRIM20 to TRIM20 Response of TRIM20 to IPCA 0.0015 0.0015 0.0010 0.0010 0.0005 0.0005 0.0000 0.0000 -0.0005 -0.0005 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Response of IPCA to TRIM20 0.004 0.004 0.003 0.003 0.002 0.002 0.001 0.001 0.000 0.000 -0.001 -0.001 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 16 - Impulse response from a bivariate VAR IPCA and Trim 20 - Response to One S.D. Innovations ± 2 S.E. Response of IPCA to IPCA

  18. 17 - Concluding remarks • A essential tool to track the inflation trend path • Use a set of core inflation indicators

  19. 18 - Further research • Use bootstrapping procedures to check the optimal trims in symmetric and asymmetric trimmed means • Combine different core inflation estimates

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