Trend Inflation and Inflation Compensation

IMF Working Papers, July 6, 2018

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Trend Inflation and Inflation Compensation

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Bibliographic details

• Authors: Juan Angel Garcia, Aubrey Poon
• Published: July 6, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484362402.001

Overview

• This paper incorporates market-based inflation expectations into trend inflation estimation literature.
• Main empirical finding: a significant decline in euro area trend inflation since 2013.
• The finding is robust to using different measures of long-term inflation expectations in the estimation, both market-based and surveys.
• Implication highlighted: the 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.

Key findings

• Significant decline in euro area trend inflation since 2013.
• Robustness: result holds when using different measures of long-term inflation expectations (market-based and surveys).
• Policy-relevant interpretation:
  • Supports the expansion of ECB’s UMP measures since 2015.
  • Provides a metric to monitor long-term inflation expectations and the likelihood of a sustained return of inflation towards levels below, but close to, 2% over the medium term.

Methodology note

• The paper incorporates market-based inflation expectations into trend inflation estimation.
• Keywords and methodological terms in the source: IL swap market, inflation compensation, inflation expectation, inflation persistence, market-based inflation expectations, state space model, stochastic volatility, swap rate, trend inflation.

Subjects and scope

• Subject areas listed: Financial crises, Global financial crisis of 2008-2009, Inflation, Inflation persistence, National accounts, Prices, Return on investment.
• Geographic scope: Global (with a focused empirical result for the euro area).

Source: IMF Working Paper by Juan Angel Garcia and Aubrey Poon, July 6, 2018.

Content in this bundle

• Trend Inflation and Inflation Compensation, WP/18/154, July 2018
  • Trend Inflation and Inflation Compensation, WP/18/154, July 2018 (Markdown version)
  • Trend Inflation and Inflation Compensation, WP/18/154, July 2018 (PDF)