Does trend inflation make a difference?

Michele Loberto and Chiara Perricone ()

No 1033, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Although the average inflation rate of developed countries in the postwar period has been greater than zero, much of the extensive literature on monetary policy has employed models that assume zero steady-state inflation. In comparing four estimated medium-scale NK DSGE models with real and nominal frictions, we seek to shed light on the quantitative implications of omitting trend inflation, that is, positive steady-state inflation. We compare certain population characteristics and the IRFs for the four models by applying two loss functions based on a point distance criterion and on a distribution distance criterion, respectively. Finally, we compare the RMSE forecasts. We repeat the analysis for three sub-periods: the Great Inflation, the Great Moderation and the union of the two periods. We do not find clear evidence for always preferring a model that uses trend inflation.

Keywords: new Keynesian DSGE; trend inflation; loss function; entropy (search for similar items in EconPapers)
JEL-codes: C1 C5 E4 E5 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Journal Article: Does trend inflation make a difference? (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1033_15

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