This paper reviews various approaches to the measurement of core inflation that have been proposed over the years using the stochastic approach to index numbers as a unifying framework. It begins with a review of how the concept of core inflation is used by the world's major central banks, including some of the inflation-targeting central banks. The author provides a comprehensive review of many of the measures of core inflation that have been developed over the years and highlights some of the conceptual and practical problems associated with them. (JEL E31, C43)

A multi-sector business cycle model is constructed which is capable of reproducing the procyclica1 behavior of cross-industry measures of capital, employment, and output. It is shown that some variants of conventional business cycle models may not be capable of reproducing these facts. It is then shown how the introduction of intratemporal adjustment costs can be crucial to such a model. These costs imply that it is difficult or costly to alter the composition of the capital goods that are produced. The presence of these costs eliminates many counterfactual observations of the model that would otherwise be present. The dynamic response of variables in the model is different from what one would observe in the standard one-sector model. The effect of including intratemporal adjustment costs for labor as well is also analyzed. , We thank Finn Kydland for many useful discussions over the course of this project. We also received helpful comments from seminar participants at University College Dublin, Pennsylvania State University, the Federal Reserve Bank of Dallas and the 1995 meetings of the Western Economic Association. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System.

The existence of a relationship between the degree of skewness of the cross-section distribution of price changes and aggregate inflation has been known.for some time. The conventional interpretation of .this relationship is that it reflects sluggishness in the adjustment of individual prices in response to shocks. In this paper we question the traditiornl interpretation of this observation, and show that a simple equilibrium model with complete price flexibility is capable of reproducing the relationship observed in the data.

This paper documents business cycle similarities and differences among the12 Federal Reserve districts in the USA and the 15 countries that make upthe EU. The comparison is suggestive of what might be expected to emerge inthe way of business cycle synchronization from a monetary union between themember states of the EU.

Core inflation plays an important role in the deliberations of monetary policy-makers. In this paper we evaluate a number of measures of core inflation constructed using euro-area data. In addition to the traditional exclusion-type core measures, we examine two newer ones, documenting their properties and evaluating their performance in terms of their ability to track underlying or trend inflation in real time. We focus on core measures derived from the Harmonized Index of Consumer Prices (HICP) as the European Central Bank has chosen to define its mandate for price stability in terms of this index, and because this is the only index of consumer prices that is compiled in a comparable manner across all members of the European Union. We document significant excess kurtosis in the cross-section distribution of price changes in the euro area, and show that several categories of prices are more volatile than those typically excluded from traditional measures of core inflation. Contrary to what one might expect, traditional measures of core inflation are not significantly less volatile than headline measures. We document the superior performance of alternative measures of core inflation in tracking trend inflation on average, but show that none of the various measures of core gave significant advance warning of the pickup in trend inflation at the beginning of 1999.JEL classification: C43, E31.

We document the response of the individual components of the Producer Price Index (PPI) to commonly used measures of monetary shocks, and show that these responses are at variance with many widely-used "macro" models of monetary nonneutrality. Monetary shocks are shown to have large relative price effects, resulting in an increase in the dispersion of the cross-section distribution of prices. Furthermore, in response to a contractionary (expansionary) monetary shock, a substantial number of prices tend to rise (fall). Most of the existing models of monetary nonneutrality are not capable of replicating these types of relative price responses.

What can account for the different contemporaneous inflation experiences of various countries, and of the same country over time? We present an analysis of the determination of inflation from a political economy perspective. We document a positive correlation between income inequality and inflation and then present a theory of the determination of inflation outcomes in democratic societies that illustrates how greater inequality leads to greater inflation, owing to a desire by voters for wealth redistribution. We conclude by showing that democracies with more independent central banks tend to have better inflation outcomes for a given degree of inequality. JEL Classification E5, H0Inégalité, inflation et l'indépendance de la banque centrale. Quels sont les facteurs qui pourraient expliquer les expériences inflationnistes tellement différentes des divers pays dans le passé récent, et l'expérience tellement différente d'un pays donné dans le temps? Les auteurs analysent ce problème de la détermination du taux d'inflation dans une perspective d'économie politique. Ils déterminent qu'il y a une corrélation positive entre l'inégalité et l'inflation, et présentent une théorie de la détermination de l'inflation dans les sociétés démocratiques qui montre comment une inégalité plus grande entraîne une inflation plus grande à cause du désir des électeurs de demander une redistribution de la richesse. Le mémoire montre en terminant que les démocraties equipées de banques centrales plus indépendantes tendent à avoir de meilleurs résultats en terme d'inflation pour un degré d'inégalité donné.

The global slack hypothesis (e.g., Martínez-García and Wynne (2010)) is central to the discussion of the trade-offs monetary policy faces in an increasingly more open world economy. Open-Economy (forward-looking) New Keynesian Phillips curves describe how expected future inflation and a measure of global output gap (global slack) affect the current inflation rate. This paper studies the (potential) weak identification of these relationships in the context of a fully-specified structural model using Bayesian estimation techniques. We trace the problems to sample size, rather than misspecification bias. We conclude that standard macroeconomic time series with a coverage of less than forty years are subject to potentially serious identification issues, and also to model selection errors. We recommend estimation with simulated data prior to bringing the model to the actual data as a way of detecting parameters that are susceptible to weak identification in short samples.