A New Model of Inflation, Trend Inflation, and Long-Run Inflation Expectations

Joshua Chan, Gary Koop and Todd Clark (2017)
Journal of Money, Credit and Banking, forthcoming
[ Journal Version | Working Paper | Code | Trend Inflation Estimates ]

This code estimates a new model of trend inflation using both inflation data and long-run inflation expectations. It also allows for a time-varying degree of persistence in the transitory component of inflation and stochastic volatility.

The methodology is illustrated using an empirical exercise with US PCE inflation. We find that long-run inflation expectations can provide substantial help in refining estimates and fitting and forecasting inflation. The same evidence indicates it is less helpful to simply equate trend inflation with the long-run inflation expectations. The trend inflation estimates can be downloaded here.