Trend Inflation and Inflation Compensation
46 Pages Posted: 22 Aug 2018
Date Written: July 2018
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: Suggested Citation