| The advantages of core inflation in measuring underlying and long-term tendencyof inflation have been recognized worldwide. Many countries and regions have builttheir core inflation indices and published it regularly and considered them as animportant concern of monetary policy. At present, China is only country of theworld’s major economies which dose not publish core inflation. Therefore, Chinashould also build core inflation indices and pay more attention to them, in order toget a better insight into the trend of inflation and improve the effectiveness ofmonetary policy. In this context, the study on China’s core inflation has practical andtheoretical significance.The paper estimated China’s core inflation rate through applying the SVARmodel which extended from Quah and Vahey’s(1995) two-variable SVAR model toestablish a four-variable SVAR model, including output, inflation, money supplyand food prices. According to the results, the characteristics of core inflation inChina, indicating that core inflation is indeed better in judging the underlyinglong-term trend of the inflation. The results combined with monetary policy ofcentral bank in different period, emphasizing that the central bank in formulating andimplementing monetary policy, not only need to focus on the CPI, but also on coreCPI.At the same time, we have to point out that the excessive focus on the core CPImay bring policy risk. Hence, the central bank should pay attention to core CPI, alsothe CPI when adjust monetary policy in the short-term policy to maintain a dynamicbalance between a long-term price stability and a short time inflation control. |
