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Measuring the level and uncertainty of trend inflation

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  • Elmar Mertens

Abstract

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.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-42.

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Date of creation: 2011
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Handle: RePEc:fip:fedgfe:2011-42

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Keywords: Inflation (Finance) - United States;

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Citations

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Cited by:
  1. Todd E. Clark & Taeyoung Doh, 2011. "A Bayesian evaluation of alternative models of trend inflation," Working Paper 1134, Federal Reserve Bank of Cleveland.
  2. Christine Garnier & Elmar Mertens & Edward Nelson, 2013. "Trend inflation in advanced economies," Finance and Economics Discussion Series 2013-74, Board of Governors of the Federal Reserve System (U.S.).
  3. James M. Nason & Gregor W. Smith, 2013. "Measuring the Slowly Evolving Trend in US Inflation with Professional Forecasts," Working Papers 1316, Queen's University, Department of Economics.
  4. James M. Nason & Gregor W. Smith, 2013. "Reverse Kalman filtering U.S. inflation with sticky professional forecasts," Working Papers 13-34, Federal Reserve Bank of Philadelphia.

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