A new model of inflation, trend inflation, and long-run inflation expectations

Joshua Chan, Todd Clark, Gary Koop

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

A knowledge of the level of trend inflation is key to many current policy decisions and several methods of estimating trend inflation exist. This paper adds to the growing literature which uses survey-based long-run forecasts of inflation to estimate trend inflation. We develop a bivariate model of inflation and long-run forecasts of inflation which allows for the estimation of the link between trend inflation and the long-run forecast. Thus, our model allows for the possibilities that long-run forecasts taken from surveys can be equated with trend inflation, that the two are completely unrelated, or anything in between. By including stochastic volatility and time-variation in coefficients, it extends existing methods in empirically important ways. We use our model with a variety of inflation measures and survey-based forecasts for several countries. We find that long-run forecasts can provide substantial help in refining estimates and fitting and forecasting inflation. The same evidence indicates it is less helpful to simply equate trend inflation with the long-run forecasts.
Original languageEnglish
Number of pages41
JournalJournal of Money, Credit and Banking
Early online date22 Jan 2018
DOIs
Publication statusPublished - 28 Feb 2018

Keywords

  • trend inflation
  • inflation expectations
  • state space model
  • stochastic volatility

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