Measuring the Level and Uncertainty of Trend Inflation
Government of the United States of America - Division of Monetary Affairs
September 28, 2011
FEDS Working Paper No. 2011-42
Firmly-anchored inflation expectations are widely viewed as playing a central role in the successful conduct of monetary policy. This paper presents estimates of trend inflation, based on information contained in survey expectations, the term structure of interest rates, and realized inflation rates. My application combines a variety of data sources at the monthly frequency and it can flexibly handle missing data arising from infrequent observations and limited data availability. In order to assess whether inflation expectations are anchored, uncertainty surrounding future changes in trend inflation - measured by a time-varying volatility of trend shocks - is estimated as well. Not surprisingly, the estimates suggest that trend inflation in the U.S. rose and fell again over the 1970s and 1980s, accompanied by increases in uncertainty. Considering the recent crisis, full-sample estimates of trend inflation fell quite a bit, but not too dramatically. In contrast, real-time estimates recorded sizeable increases of trend uncertainty during the crisis of 2007/2008, which have abated since then.
Number of Pages in PDF File: 52
Keywords: Trend cycle model, inflation target, stochastic volatility, surveys, bayesian econometrics
JEL Classification: C53, E37, E47, E58working papers series
Date posted: November 9, 2011
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