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

This paper develops a bivariate model of inflation and a survey-based long-run forecast of inflation that allows for the estimation of the link between trend inflation and the long-run forecast. Thus, our model allows for the possibilities that long-run forecasts taken from surveys can be equated with trend inflation, that the two are completely unrelated, or anything in between. Using a variety of inflation measures and survey-based forecasts for several countries, we find that long-run forecasts can provide substantial help in refining estimates and fitting and forecasting inflation. It is less helpful to simply equate trend inflation with the long-run forecasts.