Core CPI Research Articles

Rounding and the Impact of News: A Simple Test of Market Rationality

Certain prominent scheduled macroeconomic news releases contain a rounded number on the first page of the release that is widely cited by newswires and the press and a more precise number in the text of the release. The whole release comes out at once. We propose a simple test of whether markets are paying attention to the rounded or unrounded numbers by studying the high-frequency market reaction to such news announcements. In the case of inflation releases, we find evidence that markets systematically ignore some of the information in the unrounded number. This is most pronounced for core CPI, a prominent release for which the rounding in the headline number is large relative to the information content of the release.

Monetary Policy Rules and Oil Price Shocks

This paper studies the relative performance of alternative monetary policy rules in the presence of oil price shocks in a small open economy optimizing model. Our analysis shows that it is important to distinguish between alternative price indices (CPI, core CPI, and GDP deflator) when modeling the effects of oil price increases. This distinction has important implications for monetary policy as the central bank has to decide which inflation rate to target. Our results demonstrate that targeting the change in the GDP deflator is an inferior monetary policy strategy in the presence of oil price shocks.

The Macroeconomic Effects of Inflation Targeting

We find evidence that inflation targeting (IT) plays a role in anchoring long-run inflation expectations and in reducing the intrinsic persistence of inflation. Over the period since 1994, private-sector long-run inflation forecasts for the United States and the euro area exhibit significant correlation with lagged inflation, whereas this correlation is largely absent for Australia, Canada, New Zealand, Sweden, and the United Kingdom, indicating that these five inflation targeters have been quite successful in delinking expectations from realized inflation. Furthermore, we show that the null hypothesis of a random walk in core CPI inflation can be clearly rejected for four of these five countries, but not for either the U.S. or the euro area. Finally, we provide some evidence concerning the initial effects of the adoption of IT in a number of emerging-market economies.

Explicit Inflation Objectives and Macroeconomic Outcomes

We find evidence that adopting an explicit inflation objective plays a role in anchoring long-run inflation expectations and in reducing the intrinsic persistence of inflation. For the period 1994-2003, private-sector long-run inflation forecasts exhibit significant correlation with lagged inflation for a number of industrial economies, including the United States. In contrast, this correlation is largely absent for the five countries that maintained explicit inflation objectives over this period, indicating that these central banks have been reasonably successful in delinking expectations from realized inflation. We also show that the null hypothesis of a random walk in core CPI inflation can be clearly rejected for four of these five countries, but not for most of the other industrial countries. Finally, we provide some evidence concerning the initial effects of the adoption of explicit inflation objectives in a number of emerging-market economies. JEL Classification: E31, E52, E58

Inflation, unemployment, and duration

In tge earky 1990s, core CPI inflation and employment cost inflation have been overpredicted by Phillips curve models, while the duration of unemployment has been unusually high. Duration adds significant information about core inflation in the post-Volcker disinflation period.