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IPS178 Sana Antoine S. J.
participation is significantly reduced. Nevertheless, it remains
significant which means that Brent price has spillover/indirect effects
on other items of CPI (transportation, for example).
 The housing “shock” (modeled by the dummy variable) has a
tremendous impact on CPI. This impact increases as we remove the
Energy and Food items from CPI.
 WAIR and M3 have a relatively minor impact on CPI. It should be noted
that we are considering a model with differenced series. In a model
with levels (such a VECM), M3 would be a main driver of CPI (both time
series are cointegrated).

4. Conclusion
Both approaches lead to the same clear conclusion: Lebanese inflation is
mainly driven by external factors, in particular the world price of oil. Such
external shocks affect directly and indirectly most items in the CPI
consumption basket. Despite a small decrease in its coefficient compared to
headline CPI, the influence of the Brent price on core CPI remains significant.
As expected, the impact of monetary policy on inflation is more significant
when considering core inflation. This study confirms that the small, open and
oil-importing economy which is Lebanon is extremely sensitive to external
factors such as world oil prices when it comes to inflation. Such external factors
account for approximately half of the volatility of inflation. Despite its
limitations, the core inflation measure is a better alternative than headline
inflation when it comes to conducting monetary policy since it filters out the
direct effects of external shocks and reflects more accurately the impact of
money supply on inflation.

References
1. Corrigan, T. D. (2005). The Relationship Between Inport Prices and Inflation
in the United States. WCOB Faculty Publications, Paper 18. Retrieved from
http://digitalcommons.sacredheart.edu/wcob_fac/18
2. Hamilton, J. D. (2012, March). Import Prices and Inflation. International
Journal of Central Banking, 8(1), 271-279.
3. Jad, S. S. (2013). Measuring Core Inflation for Lebanon, www.bdl.gov.lb.
4. Johnson, M. (n.d.). Core Inflation: A measure of inflation for policy
purposes. Montreal.
5. McCarthy, J. (1999). Pass-Through of Exchange Rates and Import Prices to
Domestic Inflation in some Industrialized Economies. New York: Federal
Reserve Bank of New York.
6. Mishkin, G. F. (2007, October 20). Headline versus Core Inflation in the
Conduct of monetary Policy. Montreal, Canada: The Federal Reserve
Board.

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