Measurement of Core Inflation : A Review of Major Approaches and Empirical Criteria

This paper provides a review of various definitions of core inflation and various existing alternative theoretical approaches to measuring core inflation, evaluating their potential advantages and disadvantages. For this purpose, two broad categories viz., statistical approaches and theoretical approach is identified. The existing literature argues in favour of statistical approach in view of its relative simplicity, statistical rationale to measuring core inflation. As a result such measures are most frequently used by central banks when compared to model based core measures. We therefore focus at some length on reviewing various statistical measures of core inflation, specifically Limited Influence Estimator (LIE) - discussing its statistical properties and the theoretical model to measuring core inflation. Given lack of uniformity on how best core inflation could be empirically derived, different statistical criteria have been applied in order to judge the best measures among alternatives. We therefore follow the following framework: uses or goals of core inflation are first described conceptually, subsequently various empirical properties of core inflation are reviewed based on each uses or goals