Measuring the level and uncertainty of trend inflation

E Mertens - Review of Economics and Statistics, 2016 - direct.mit.edu
Review of Economics and Statistics, 2016direct.mit.edu
Firmly anchored inflation expectations are widely viewed as playing a central role for the
conduct of monetary policy. This paper presents estimates of trend inflation, based on
information contained in monthly data on realized inflation, survey expectations, and the
term structure of interest rates. In order to assess whether inflation expectations are
anchored, a timevarying volatility of trend shocks is estimated as well. While there is some
commonality in inflation-and survey-based estimates of trend inflation, yield-based trend …
Abstract
Firmly anchored inflation expectations are widely viewed as playing a central role for the conduct of monetary policy. This paper presents estimates of trend inflation, based on information contained in monthly data on realized inflation, survey expectations, and the term structure of interest rates. In order to assess whether inflation expectations are anchored, a timevarying volatility of trend shocks is estimated as well. While there is some commonality in inflation- and survey-based estimates of trend inflation, yield-based trend estimates embed a highly persistent component orthogonal to trend inflation. Trimmed-mean inflation rates and survey forecasts are most indicative of trend inflation.
MIT Press
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