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Measuring the Slowly Evolving Trend in US Inflation with Professional Forecasts

  • James M. Nason

    ()

    (North Carolina State University)

  • Gregor W. Smith

    ()

    (Queen's University)

Much research studies US inflation history with a trend-cycle model with unobserved components. A key feature of this model is that the trend may be viewed as the Fed's evolving inflation target or long-horizon expected inflation. We provide a new way to measure the slowly evolving trend and the cycle (or inflation gap), based on forecasts from the Survey of Professional Forecasters. These forecasts may be treated either as rational expectations or as adjusting to those with sticky information. We find considerable evidence of inflation-gap persistence and some evidence of implicit sticky information. But statistical tests show we cannot reconcile these two widely used perspectives on US inflation and professional forecasts, the unobserved-components model and the sticky-information model.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1316.pdf
File Function: First version 2013
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1316.

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Length: 43 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:qed:wpaper:1316
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  1. Michael T. Kiley, 2006. "A quantitative comparison of sticky-price and sticky-information models of price setting," Finance and Economics Discussion Series 2006-45, Board of Governors of the Federal Reserve System (U.S.).
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  17. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
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