Indicators of core inflation: Case of Tunisia

The aim of this paper is to provide a credible measure of inflation. This credibility is of great importance for successful inflation targeting regime. This paper proposes a technique to solve a conceptual disparity between inflation phenomenon and its measurement. For this, we proposed an alternative measure called core inflation, defined as the inflation component that has no real impact on long-term production. Evaluation of core inflation was obtained using a VAR system under the assumption that variations in the extent of inflation are affected by two types of shock. The first type has no impact on real output in the long term, while the second can have this effect. This approach is a reconstruction of the approach of Quah and Vahey (1995) in the case of the Tunisian economy. The study concluded that the administered prices constitute a major obstacle to measure, interpret and forecast inflation. Central Bank of Tunisia has no control over a third of the CPI basket. This feature of the Tunisian economy is simply a sign of weakness of the economic system and the need for monetary authorities to continue its efforts to liberalize prices. Introduction The concept of core inflation has played an important role in the decisions of responsible monetary policy in recent years. However, despite the centrality of this concept, there is still no consensus on the best measure of core inflation. The most widely adopted approach is the exclusion of certain categories of price inflation rate as a whole. It reflects the origin of the concept of core inflation during the turbulent 1970s. However, more recently, many economists are trying to set a robust measure of core inflation. Core inflation has become in recent years the most important subject of study for central banks of various countries. In fact, many of them are given as central or even ultimate objective of reducing inflation and achieving price stability. However, government policies other than monetary policy can play an important role in maintaining this goal. But the central bank sees its role as crucial when it admits that inflation can persist for a long time if it is tolerated by the monetary policy. It is important, then, that it should follow closely the evolution of the inflation rate.