Trend Inflation and Inflation Compensation

46 Pages Posted: 22 Aug 2018

See all articles by Juan A. Garcia

Juan A. Garcia

European Central Bank (ECB)

Aubrey Poon

University of Strathclyde - Centre for Applied Macroeconomic Analysis

Date Written: July 2018

Abstract

This paper incorporates market-based inflation expectations to the growing literature on trendinflation estimation, and finds that there has been a significant decline in euro area trendinflation since 2013. This finding is robust to using different measures of long-term inflationexpectations in the estimation, both market-based and surveys. That evidence: (i) supports theexpansion of ECB's UMP measures since 2015; (ii) provides a metric to monitor long-terminflation expectations following their introduction, and the likelihood of a sustained return ofinflation towards levels below, but close to, 2% over the medium term.

Keywords: trend inflation, market-based inflation expectations, state space model, stochastic volatility, Bayesian Analysis, Time-Series Models

JEL Classification: C11, C32, E31

Suggested Citation

Garcia, Juan Angel and Poon, Aubrey, Trend Inflation and Inflation Compensation (July 2018). Available at SSRN: https://ssrn.com/abstract=3236774 or http://dx.doi.org/10.2139/ssrn.3236774

Juan Angel Garcia (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Aubrey Poon

University of Strathclyde - Centre for Applied Macroeconomic Analysis ( email )

16 Richmond Street
Glasgow 1XQ, Scotland
United Kingdom

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