Stability price index, core inflation and output volatility

Abstract

This paper examines the relationship between the 'exclusion' type core inflation measures and the stability price index. Empirical results for Malaysia and Pakistan suggests that, if targeting core inflation index is to stabilize output, weights of the export-oriented sectors (energy for Malaysia and foodstuffs for Pakistan) should be reduces, in relation to the consumers' price index weights, and for import-oriented sectors, increased. It also indicates that, in order to maintain real sector stability, central bankers should include the fundamental component of the stock market prices in the price index they target.

Seeking Price and Macroeconomic Stabilisation in the Euro Area: The Role of House Prices and Stock Prices

“…Our findings are in line with those reported in Charemza et al (2013) and Shah and Ahmad (2017), who present evidence suggesting that incorporating stock prices into the price index targeted by the central banks increases output stability. Notes: In the ordinary brackets below the parameter estimates, the corresponding t-statistics are shown * indicates significance at 1% level "stock" stands for stock prices, "fun" fundamental stock prices and "bub" bubble (non-fundamental) stock prices.…”

“…The benchmark typically applied by monetary authorities for inflation targeting is the consumer price index (CPI). However, existing literature argues that the CPI covers only the current cost of living and does not include expected inflation (Alchian and Klein, 1973;Goodhart, 2001;Mankiw and Reis, 2003;Kent and Low, 1997;Shiratsuka, 1999;Shah, 2013 andAhmad, 2017). A central bank faces the problem of how to choose an appropriate price index as a measure of inflation which would help to reduce output instability.…”

“…The ESI can be described as: Mankiw and Reis (2003) derived a two-sector theoretical analysis of the central bank's problem. Later, Charemza and Shah (2013) and Shah and Ahmad (2017) extended further the theoretical analysis for a four-sector setting and derived its algebraic solution 9 . As mentioned above, the central bank's objective is to promote economic stability by choosing a target price index, given the constraints imposed by the price-setting procedure.…”

“…Additionally, sectoral idiosyncratic shocks can be correlated with the output gap, causing identification problems. To address these issues, rather than Mankiw and Reis, we follow Charemza and Shah (2013) and Shah and Ahmad (2017) and apply a Vector Autoregressive (VAR) model to Börse, Dow Jones & Company and SWX Swiss Exchange. The most important feature of this index is that it brings together the 50 largest companies among the 19 supersectors in terms of market capitalisation in eleven member countries (Austria, Belgium, Germany, Finland, France, Italy, Ireland, Luxembourg, Netherlands, Portugal and Spain).…”

“…ic indicators in most EA countries. We follow the methodology proposed by Charemza and Shah (2013) and extended by Shah and Ahmad (2017) to estimate the sectoral parameters and target weights for the ESI, where the aim of the central bank is to obtain greater economic stability. Firstly, the sectoral parameters are set or estimated in order to compute the target weights for the ESI.…”