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New Paper on Trend Inflation

posted Nov 14, 2011, 1:08 PM by Elmar Mertens   [ updated Nov 19, 2011, 5:10 AM ]
"Measuring the Level and Uncertainty of Trend Inflation" extracts a measure of trend inflation from a panel of indicator variables for the U.S. since the 1960s. A central element of my approach is to allow for time-varying volatility in trend shocks, discerning periods of unanchored inflation expectations (like the late 1970s) and well-anchored inflation expectations (like the Great Moderation period).

The specific contribution of my paper is to condition the estimates on a broad set of variables, including forward-looking measures like survey expectations and long-term bond yields. Real-time results suggest considerable stress not only during the late 1970s but also during the recent crisis.

The dataset is monthly, and the model can flexibly handle variables sampled at different frequencies and with missing observations.

Below are estimates derived from realized inflation rates and survey data:

The top panel shows the trend level in annualized percentage points, the bottom panel displays the estimated standard deviation of trend shocks.

Here is a comparison between the trend level and some select data series:

Here are estimates for the recent crisis, derived from different information sets:

And here are real-time estimates (derived from a smaller information set):

See my working papers for more.