Has trend inflation shifted?: An empirical analysis with an equally-spaced regime-switching model

This paper proposes a new econometric framework for estimating trend inflation and the slope of the Phillips curve with a regime-switching model. A unique aspect of our approach is to assume equally-spaced regimes. In our baseline model, we specify regimes for the trend inflation at one-percent intervals. This framework serves as a parsimonious trend inflation model, and the estimated probability of the trend inflation being in each regime provides an easily interpretable illustration in policy debate and analysis. An empirical result for the United States shows a considerably stable trend inflation at two percent since the late 1990s. A result for Japan indicates that the 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 in 2013.