A SVAR model for estimating core inflation in the Euro zone

Abstract

A traditional role of central banks has been to protect the purchasing power of money by keeping a roof on inflation. Recently, several central banks have explicitly assumed an inflation control target. This is the case, among others, of the European Central Bank (ECB) whose monetary policy goal is to keep an annual inflation rate below 2% over a medium-term horizon (ECB, 2001). In practice, inflation is often measured in terms of the Consumer Price Index (CPI). However, the headline inflation rate is not totally under the control of the ECB. In this study core inflation is measured by means of the structural VAR approach, in particular it is based on long-run restrictions over crucial macroeconomic variables: inflation, money and output. Core inflation is estimated and compared with the standard measured inflation.

Notes

Aggregation procedures can be consulted on Beyer et al. (2000).

Data are downloadable at http://www.uned.es/dpto-economia-aplicada-cuantitativa1/mariano.htm