Working Paper Series no. 51: Measuring Core Inflation Using a Structural VAR Approach: An Application to France, Germany and the UK (In French)

Abstract

Central banks should dispose of a precise measure of the structural inflation, i.e. the inflation adjusted from the economic cycle. This component of inflation, also called core inflation, is deduced from a structural VAR. Economists agree upon the long-term neutrality of inflation on production. Imposing such a constraint on a structural VAR, including inflation and production, allows to disentangle the core and the cyclical components of inflation. The core inflation is obtained by cancelling the cyclical component of inflation. Quah and Vahey(1995) use the identification method proposed by Blanchard and Quah(1989) to compute the core inflation in UK. We apply the same technique for France, Germany and UK. Moreover, the procyclical characteristic of short-term inflation is showed whereas, since 1993, inflation would be closer to its underlying level in Germany. Stronger nominal rigidity in Germany would explain such a fact.

Pascal Jacquinot
January 1998

Keywords : Core inflation, Structural VAR