Fitting U.S. Trend Inflation: A Rolling-Window Approach
The role of trend inflation shocks for the U.S. macroeconomic dynamics is investigated by estimating two DSGE models of the business cycle. Policymakers are assumed to be concerned with a time-varying inflation target, which is modeled as a persistent and stochastic process. The identification of trend inflation shocks (as opposed to a number of alternative innovations) is achieved by exploiting the measure of trend inflation recently proposed by Arouba and Schorfheide (2011, American Economic Journal: Macroeconomics). Our main findings point to a substantial contribution of trend inflation shocks for the volatility of inflation and the policy rate. Such contribution is found to be time-dependent and highest during the mid-1970s to mid-1980s.
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