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Has Trend Inflation Shifted?

: An Empirical Analysis with a Regime-Switching Model

May 1, 2015
Sohei Kaihatsu*1
Jouchi Nakajima*2

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Abstract

This paper proposes a new econometric framework for estimating trend inflation and the slope of the Phillips curve with a regime-switching model. As a unique aspect of our approach, we assume regimes for the trend inflation at one-percent intervals, and estimate the probability of the trend inflation being in each regime. The trend inflation described in the discrete manner provides for an easily interpretable explanation of estimation results as well as a robust estimate. An empirical result indicates that Japan's trend inflation stayed at zero percent for about 15 years after the late 1990s, and then shifted away from zero percent after the introduction of the price stability target and the quantitative and qualitative monetary easing. The U.S. result shows a considerably stable trend inflation at two percent since the late 1990s.

JEL Classifications
C22, E31, E42, E52, E58

Keywords
Phillips curve; Regime-switching model; Trend inflation

We are grateful for the helpful comments from the staff of the Bank of Japan. The views expressed herein are those of the authors alone and do not necessarily reflect those of the Bank of Japan.

  •   *1 Monetary Affairs Department, Bank of Japan
    E-mail : souhei.kaihatsu@boj.or.jp
  •   *2 Monetary Affairs Department, Bank of Japan
    E-mail : jouchi.nakajima@boj.or.jp

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