966
Serial number: 15/2013
Author(s): R. Rahmanov, S. Huseynov, Sh Adigozalov
Language: Azerbaijani
Date: 2013
Abstract: The central banks which aim to shift to inflation targeting framework have to make a decision regarding the price index they will target. However, before making the final decision, several criteria must be taken into consideration, “cost-benefit” analysis of existing price indices must be made and comparative advantages of each index must be revealed.
The article discusses whether the Central Bank of the Republic of Azerbaijan plans to the medium run should target headline inflation or core inflation. Along with existing core inflation, using the Bayesian Dynamic Factor model, the new core inflation is calculated and furthermore, several statistical tests are applied to test adequacy of the new core inflation measure.
The estimations show that the new core inflation can be used as an indicator of the long run trend of inflation, whereas the existing core inflation is a good indicator in the short run. The article concludes that in a decision making process, the Central Bank should use the new core inflation measure as a trend indicator since it contains much more information than the existing one. However, to make monetary policy decisions comprehensible to the public, it is recommended to target headline inflation.
Key words: Consumer price index, core inflation, Gibbs algorithm
JEL classification: E30, E31
