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Structural shocks and trend inflation

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  • Bowen Fu, Ivan Mendieta-Muñoz

Abstract

We propose an unobserved components model with stochastic volatility and structural shocks to explore the relevant factors that influence trend inflation in the USA. Using structural shocks that incorporate a broad set of information for the US economy, we find that four structural shocks have significant effects on trend inflation: productivity, price mark-up, government policy, and finance. During and in the aftermath of the Great Recession, trend inflation became more volatile after incorporating the structural shocks, implying that long-run inflation expectations tended to be less well-anchored in these periods.

Suggested Citation

  • Bowen Fu, Ivan Mendieta-Muñoz, 2023. "Structural shocks and trend inflation," Working Paper Series, Department of Economics, University of Utah 2023_04, University of Utah, Department of Economics.
    • Handle: RePEc:uta:papers:2023_04
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    File URL: https://economics.utah.edu/research/publications/2023-04.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    trend inflation; structural shocks; dynamics of inflation expectations; unobserved components; stochastic volatility. JEL Classification: C11; C32; E31; E37;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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