This article estimates UK core inflation in a structural Vector Autoregression (VAR) framework. While building on the work of Quah and Vahey (1995), we extend their two-variable VAR model to allow for different dynamics depending on the nature of the shocks that potentially influence the process of core inflation. We also construct a combined measure of core inflation estimates on the basis of their reliabilities. Empirical evidence shows that the new measures demonstrate marked improvement in their eligibility to serve as core inflation estimators. Furthermore, the combined measure is shown to perform best. It appears that the conventional core measures such as the retail prices excluding mortgage interest payments (RPIX) and the Harmonized Index of Consumer Prices (HICP) inflation series are not successful in capturing the underlying trend of inflation, casting some doubt on their current use in the making of monetary policy decisions.
Bibliographical noteFunding Information:
The authors would like to thank an anonymous referee of the Journal and seminar participants at Yonsei Economic Research Institute for their valuable comments on earlier versions of the article. This work was supported by the Yonsei University Research Fund. The usual disclaimer applies.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics