Trend Inflation and Inflation Compensation

García, Juan Ángel; Poon, Aubrey

doi:10.5089/9781484362402.001

Cited by 5 publications

(7 citation statements)

References 6 publications

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“…Nonetheless, splitting the sample at the second quarter of 2008, Lyziak and Paloviita (2017) evidence points to a deanchoring of long-term inflation expectations based on the significant impact of short-term expectations on longer term ones over the second part of their sample. García and Poon (2018) estimate euro area (long-term) trend inflation using actual inflation developments and different measures of long-term inflation expectations, including surveys, and show that there has been a significant decline below the 2% level in euro area trend inflation since 2013, consistent with a de-anchoring of inflation expectations.…”

Section: Related Literaturementioning

confidence: 94%

Inflation News and Euro Area Inflation Expectations

García

Werner²

2018

IMF Working Papers

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Do euro area inflation expectations remain well-anchored? This paper finds that the protracted period of low (and below-target) inflation in the euro area since 2013 has weakened their anchoring. Testing their sensitivity to inflation and macroeconomic news, this paper expands existing results in two key dimensions. First, by analyzing all available (advanced) inflation releases. Second, the reactions of expectations are investigated at daily, time-varying and intraday frequency regressions to add robustness to our conclusions. Results point to a significant impact of inflation news over recent years that had not been observed before in the euro area.

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Section: Related Literaturementioning

confidence: 94%

Inflation News and Euro Area Inflation Expectations

García

Werner²

2018

IMF Working Papers

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“…We add to the empirical literature that models euro area inflation dynamics with the use of survey inflation expectations. Garcia and Poon (2018) and Banbura and van Vlodrop (2018) estimate models where inflation's long-run trend rate is linked to data from long-term survey forecasts or market-based expectations, and Grishchenko et al (2017) incorporate the survey expected inflation distribution in a factor model with constant parameters and stochastic volatility. Yet, the combination of information from the expectations term structure (of short-, medium-and long-term expectations) has not yet been exploited for estimating the time variation in the dynamics of both the trend and cycle of euro area inflation.…”

Section: [Insert Figure 1 Here]mentioning

confidence: 99%

“…For a model-consistent treatment of inflation expectations in a DSGE model, see, for example, Del Negro and Eusepi (2011),Smets et al (2014) andCui et al (2015).6 Applications using euro area data areGarcia and Poon (2018), Ba nbura and van Vlodrop (2018) for the former, and Grishchenko et al (2019) for the latter.STEVENS AND WAUTERS…”

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confidence: 99%

Is euro area lowflation here to stay? Insights from a time‐varying parameter model with survey data

Stevens

Wauters

2021

J of Applied Econometrics

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Inflation has been persistently weak in the euro area despite the economic recovery since 2013. We investigate the sources behind this protracted low inflation by building a time-varying parameter model that jointly explains the dynamics of inflation and inflation expectations from the ECB's Survey of Professional Forecasters. We find that the inclusion of survey data strengthens the view that low inflation was mainly due to cyclical drivers. In particular, the model with survey expectations finds a more muted decline of trend inflation in recent years and a larger degree of economic slack. The impact of economic slack and import prices on inflation is found to have increased in recent years. We also find that survey expectations have become less persistent over the financial crisis period, and that including survey data improves the model's out-of-sample forecasting performance.

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“…This definition of a star is consistent with the notion of Beveridge-Nelson trend decomposition, and an extensive literature has adopted this approach to estimate stars. Equivalently, as commonly defined in the trend estimation literature, the infinite-horizon forecast could be viewed as an estimate of trend conditional on the current information set (e.g., CCK, Garcia and Poon, 2018, Mertens, 2016, Lee and Nelson, 2007, Morley, 2002. As discussed in Mertens (2016), among others, different information sets would likely yield different estimates of the infinite-horizon forecast (or trend).…”

Section: The Econometric Notion Of a Long-run Equilibriummentioning

confidence: 99%

A Unified Framework to Estimate Macroeconomic Stars

Zaman

2021

Working Paper (Federal Reserve Bank of Cleveland)

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We develop a flexible semi-structural time-series model to estimate jointly several macroeconomic "stars" -i.e., unobserved long-run equilibrium levels of output (and growth rate of output), the unemployment rate, the real rate of interest, productivity growth, the price inflation, and wage inflation. The ingredients of the model are in part motivated by economic theory and in part by the empirical features necessitated by the changing economic environment. Following the recent literature on inflation and interest rate modeling, we explicitly model the links between long-run survey expectations and stars to improve the stars' econometric estimation. Our approach permits time variation in the relationships between various components, including time variation in error variances. To tractably estimate the large multivariate model, we use a recently developed precision sampler that relies on Bayesian methods. The by-products of this approach are the time-varying estimates of the wage and price Phillips curves, and the pass-through between prices and wages, both of which provide new insights into these empirical relationships' instability in US data. Generally, the contours of the stars echo those documented elsewhere in the literature -estimated using smaller models -but at times the estimates of stars are different, and these differences can matter for policy. Furthermore, our estimates of the stars are among the most precise. Lastly, we document the competitive real-time forecasting properties of the model and, separately, the usefulness of stars' estimates if they were used as steady-state values in external models.

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Trend Inflation and Inflation Compensation

Cited by 5 publications

References 6 publications

Inflation News and Euro Area Inflation Expectations

Inflation News and Euro Area Inflation Expectations

Is euro area lowflation here to stay? Insights from a time‐varying parameter model with survey data

A Unified Framework to Estimate Macroeconomic Stars

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