The Optimal Method of Measuring Core Inflation: The Case of Iran

This study tries to measure core inflation in Iran's economy, using SVAR method, during the period (1973-2007). Importance of understanding core inflation lies on the fact that the core inflation reveals the likely noises (shocks). By using core inflation criterion in policy making, monetary policies become more effective, as policymakers just react to the fluctuations in measured inflation, ignoring temporary noises. In an attempt to measure core inflation in Iran, three variables, namely oil price, gross national product, and consumer price index are deployed in a Structural Vector Auto Regressive (SVAR) model, with imposing some restrictions to make the model consistent with the structure of Iran's economy. The results show that in most cases, headline inflationary pressures have been more than measured inflation, owning to the deflationary pressures of oil export revenues in the economy.