MONETARY REGIMES AND CORE INFLATION

I am grateful to Laurence Ball, Louis Maccini and Athanasios Orphanides for comments and suggestions and to the economists named herein who graciously provided their data. MONETARY REGIMES AND CORE INFLATION This paper examines the interaction of core inflation and monetary policy. Interest in core has grown because of inflation targeting. Core inflation is defined in numerous ways giving rise to many potential measures; I define core inflation as the best forecaster of inflation. A cross-country study finds that core inflation differs across monetary regimes. A theoretical model shows that in an accommodative regime lagged inflation is core inflation and in a non-accommodative regime, such as strict inflation targeting, the trimmed mean is core. Using unconditional regressions I find that the theoretical model holds empirically. Through conditional regressions, inflation expectations are found to be consistent with the accommodativeness of the central bank