Developing an Underlying Inflation Gauge for China

29 Pages Posted: 1 Oct 2014

See all articles by Marlene Amstad

Marlene Amstad

The Chinese University of Hong Kong, Shenzhen

Ye Huan

The People's Bank of China (PBC)

Guonan Ma

Bruegel

Multiple version iconThere are 2 versions of this paper

Date Written: September 2014

Abstract

The headline consumer price inflation (CPI) is often considered too noisy, narrowly defined, and/or slowly available for policymaking. On the other hand, traditional core inflation measures may reduce volatility but do not address other issues and may even exclude important information. This paper develops a new underlying inflation gauge (UIG) for China which differentiates between trend and noise, is available daily and uses a broad set of variables that potentially influence inflation. Its construction follows the works at other major central banks, adopts the methodology of a dynamic factor model that extracts the lower frequency components as developed by Forni et al. (2000) and draws on the experience of the People's Bank of China in modelling inflation. The paper is the first application of this type of dynamic factor model for inflation to any large emerging market economy. Our UIG for China is less noisy but still closely tracks the headline CPI. It does not suffer from the excess volatility reduction that plagues traditional core inflation measures and instead provides additional information. Finally, when forecasting the headline CPI, our UIG for China outperforms traditional core measures over different samples.

Keywords: Inflation, Dynamic Factor Models, Core Inflation, Monetary Policy, Forecasting, China

JEL Classification: C13, C33, C43, E31, E37, G15

Suggested Citation

Amstad, Marlene and Huan, Ye and Ma, Guonan, Developing an Underlying Inflation Gauge for China (September 2014). BIS Working Paper No. 465. Available at SSRN: https://ssrn.com/abstract=2501662

Marlene Amstad (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

Ye Huan

The People's Bank of China (PBC)

No.32 Chengfang Street
Xi Cheng, Beijing 100800
China

Guonan Ma

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

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