Page 15 - Invited Paper Session (IPS) - Volume 2

IPS178 Sana Antoine S. J.
1. Introduction
The relationship between imports and inflation has been the subject of
many studies. It is clear that a major part of inflation fluctuations arises from
external factors which cannot be controlled by the local monetary authority.
Consequently, policymakers need to assess the true impact of their actions on
the inflation level and estimate the volatility caused by external shocks. This
has led monetary authorities and academics to define core inflation as a new
measure of inflation in which the influence of external and highly volatile
factors has been reduced (ideally removed). Such instrument enables
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policymakers to isolate and target the structural and controllable factors
behind inflation. In other words, it captures the component of price change
that is common to all domestic items and excludes components that are
subject to frequent and temporary price shocks (such as food and energy
prices).
This paper aims to analyze both headline and core inflation in the
Lebanese economy, and helps identify to what extent the Lebanese headline
inflation is affected by domestic factors and imported inflation.
The next section describes the methodology which has been followed to
measure imported inflation: two stand-alone approaches, namely a sectorial
empirical approach and an econometrical one, are used to estimate the share
of imported inflation in headline inflation. By adopting these two distinct
approaches, we are able to perform a robustness check to the overall study.
The following section presents the results of our approaches while the last
section concludes the study and provides us some final remarks.

2. Methodology
a- Sectoral approach
The first approach is based on the way the Consumer Price Index (CPI) is
built: a choice of items which are highlydependent on external factors is
performed and allows to assess their impact on CPI and to build a core CPI
measure (by removing these items). For the sake of completeness, a brief
review of how the CPI is computed can be found hereafter.
The CPI is an index of the cost, through time, of a fixed market basket of
goods and services purchased by a typical household for consumption in
some base period. The composition of the Lebanese basket is derived from a
detailed expenditure survey conducted by the Central Administration of

3 Through expansionary or contractionary monetary policies.
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