Macroeconomic Dynamics

Articles

U.S. CORE INFLATION: A WAVELET ANALYSIS

Kevin Dowda1 c1, John Cottera2 and Lixia Loha3

a1 Cass Business School

a2 University College Dublin

a3 Sheffield Hallam University

Abstract

This paper proposes the use of wavelet methods to estimate U.S. core inflation. It explains wavelet methods and suggests that they are ideally suited to this task. Comparisons are made with traditional Consumer Price Index–based and regression-based measures for their performance in following trend inflation and predicting future inflation. Results suggest that wavelet-based measures perform better, and sometimes much better, than the traditional approaches. These results suggest that wavelet methods are a promising avenue for future research on core inflation.

(Online publication June 10 2010)

Keywords:

  • Core Inflation;
  • Wavelets;
  • Trend Inflation;
  • Inflation Prediction

Correspondence:

c1 Address correspondence to: Kevin Dowd, Pensions Institute, Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, United Kingdom; e-mail: Kevin.Dowd@hotmail.co.uk.

Footnotes

The authors thank Tim Cogley, Ramo Gençay, Julie K. Smith, Theo Panagiotidis, and two anonymous referees for helpful comments on an earlier draft. They also thank Julie Smith for permission to use her data. Cotter acknowledges the support of Science Foundation Ireland under Grant Number 08/SRC/FM1389.

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