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Trend inflation and structural shocks

Author

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  • Fu, Bowen
  • Mendieta-Munoz, Ivan

Abstract

This paper studies the effects of key underlying macroeconomic variables on the trend inflation rate in the USA. To do so, we consider eight structural shocks that incorporate a broad set of information for the US economy and that can be regarded as the main structural determinants of the latter. Using a Bayesian estimation procedure, we estimate the effects of these structural shocks on the trend inflation rate via an unobserved components model with stochastic volatility and structural shocks. We document the following results. First, four structural shocks have significant and quantitatively important effects on the trend inflation rate. Price mark-up and government policy shocks increase trend inflation, which suggests that these shocks tend to have long-run inflationary effects. Finance and productivity shocks decrease trend inflation, thus suggesting that these shocks tend to have long-run deflationary effects. Second, during the Global Financial Crisis of 2007-9, the trend in inflation became more volatile because of the combined effects derived from these four structural shocks.

Suggested Citation

  • Fu, Bowen & Mendieta-Munoz, Ivan, 2025. "Trend inflation and structural shocks," EconStor Preprints 308793, ZBW - Leibniz Information Centre for Economics.
  • Handle: RePEc:zbw:esprep:308793
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    References listed on IDEAS

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    More about this item

    Keywords

    trend inflation; structural shocks; state space models; unobserved components;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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