September 2015 issue contents
Trend Inflation in Advanced Economies

by Christine Garniera, Elmar Mertensb, and Edward Nelsonc


We derive estimates of trend inflation for fourteen advanced economies from a framework in which trend shocks exhibit stochastic volatility. The estimated specification allows for time variation in the degree to which longer-term inflation expectations are well anchored in each economy. Our results bring out the effect of changes in monetary regime (such as the adoption of inflation targeting in several countries) on the behavior of trend inflation. Our estimates represent an expansion of those in the previous literature along several dimensions. For each country, we employ a multivariate approach that pools different inflation series in order to identify their common trend. In addition, our estimates of the inflation gap (that is, the difference between trend and observed inflation) are allowed to exhibit considerable persistence-a treatment that affects the trend estimates to some extent. A forecast evaluation based on quasi-real-time estimates registers sizable improvements in inflation forecasts at different horizons for almost all countries considered. It remains the case, however, that simple random-walk forecasts of inflation are difficult to outperform by a statistically significant amount.

JEL Codes: C53, E37, E47, E58.

Full article (PDF, 72 pages, 3997 kb)

Discussion by James Morley

a Tufts University 
b Federal Reserve Board 
c University of Sydney