A New Model of Trend Inflation

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Chan, Joshua C.C. and Koop, Gary and Potter, Simon M. (2012) A New Model of Trend Inflation. Discussion paper. University of Strathclyde, Glasgow.

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Abstract

This paper introduces a new model of trend (or underlying) in‡ation. In contrast to many earlier approaches, which allow for trend inflation to evolve according to a random walk, ours is a bounded model which ensures that trend inflation is constrained to lie in an interval. The bounds of this interval can either be fixed or estimated from the data. Our model also allows for a time-varying degree of persistence in the transitory component of inflation. The bounds placed on trend inflation mean that standard econometric methods for estimating linear Gaussian state space models cannot be used and we develop a posterior simulation algorithm for estimating the bounded trend inflation model. In an empirical exercise with CPI inflation we find the model to work well, yielding more sensible measures of trend inflation and forecasting better than popular alternatives such as the unobserved components stochastic volatility model.

ORCID iDs

Chan, Joshua C.C., Koop, Gary ORCID logoORCID: https://orcid.org/0000-0002-6091-378X and Potter, Simon M.;
  • Item type:Monograph(Discussion paper)
    ID code:67956
    Dates:
    Date
    Event
    13 February 2012
    Published
    Notes:Published as a paper within the Discussion Papers in Economics, No. 12-02 (2012)
    Subjects:Social Sciences > Economic Theory
    Department:Strathclyde Business School > Economics
    Depositing user: Pure Administrator
    Date deposited:22 May 2019 10:45
    Last modified:13 Nov 2024 13:50
    Related URLs:
    URI:https://strathprints.strath.ac.uk/id/eprint/67956
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