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A1657
Topic: Contributed on Regime change modeling in economics and finance I Title: On trend inflation: An empirical analysis with a regime-switching model Authors:  Sohei Kaihatsu - Bank of Japan (Japan) [presenting]
Jouchi Nakajima - Bank of Japan (Japan)
Abstract: We propose 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 considerably stable trend inflation at two percent since the late 1990s.