Trend Inflation and Inflation Compensation

Poon, Aubrey and Garcia, Juan Angel (2018) Trend Inflation and Inflation Compensation. Working paper. International Monetary Fund, Washington D.C..

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Abstract

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