Measuring core inflation as the common trend of prices

In recent years, many central banks have adopted inflation targeting policies starting an intense debate about which measure of inflation to adopt. The literature on core inflation has tried to develop indicators of inflation which would respond only to "significant" changes in inflation. This paper defines a measure of core inflation as the common trend of prices in a multivariate dynamic model, that has, by construction, three properties: it filters idiosyncratic and transitory macro noises, and it leads the future leveI of headline inflation. We also show that the popular trimmed mean estimator of core inflation could be regarded as a proxy for the ideal GLS estimator for heteroskedastic data. We employ an asymmetric trimmed mean estimator to take account of possible skewness of the distribution, and we obtain an unconditional measure of core inflation.

Testing for super-exogeneity in the presence of common deterministic shifts

This paper introduces the concept of common deterministic shifts (CDS). This concept is simple, intuitive and relates to the common structure of shifts or policy interventions. We propose a Reduced Rank technique to investigate the presence of CDS. The proposed testing procedure has standard asymptotics and good small-sample properties. We further link the concept of CDS to that of superexogeneity. It is shown that CDS tests can be constructed which allow to test for super-exogeneity. The Monte Carlo evidence indicates that the CDS test for super-exogeneity dominates testing procedures proposed in the literature.