A0972
Title: Trend inflation and monetary policy
Authors: Luis Uzeda - Bank of Canada (Canada) [presenting]
Abstract: A new empirical framework is developed to investigate the relationship between monetary policy and trend inflation in the U.S. economy. We combine two modeling approaches: measuring trend inflation using an unobserved components model and estimation of monetary policy rules that allow for their reaction parameters to change in a state-dependent fashion. State dependency is determined by linking trend inflation dynamics to plausible changes in the conduct of monetary policy. We document two main results: (1) the relationship between monetary policy and trend inflation has strengthened during the Great Moderation relative to the Great Inflation period; and (2) the stabilization of trend inflation around the mid-1980s is consistent with a regime change akin to the adoption of an inflation targeting strategy.
