A structural common factor approach to core inflation estimation and forecasting

In the article we propose a new methodological approach to core inflation estimation, based on a frequency domain principal components estimator, suited to estimate systems of fractionally co-integrated processes. The proposed core inflation measure is the common persistent feature in inflation and excess nominal money growth and bears the interpretation of monetary inflation. The proposed measure is characterized by all the properties that an 'ideal' core inflation process should show, providing also a superior forecasting performance relative to other available measures.