Estimating Trend Inflation Based on Unobserved Components Model: Is It Correlated with the Inflation Gap?

Shih Tang Hwu, Chang-Jin Kim

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

Building on the work of Stock and Watson (2007), this paper empirically shows that a negative correlation between innovations to trend inflation and the inflation gap plays an important role in the dynamics of postwar U.S. inflation. Additional features that we incorporate in our model include regime-switching inflation gap persistence and association between inflation and inflation uncertainty. The resulting estimate of trend inflation is smooth, and our model provides superior out-of-sample forecasts than Stock and Watson's (2007) unobserved components model with stochastic volatility or than Atkeson and Ohanian's (2001) random walk model does.

Original languageEnglish
JournalJournal of Money, Credit and Banking
DOIs
Publication statusAccepted/In press - 2019 Jan 1

Keywords

  • C53
  • E37
  • inflation gap
  • Markov-switching volatility
  • trend inflation

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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