RIEB Discussion Paper Series No.2024-11

Title

Measuring Trend Inflation Using Financial Condition: The Case of Japan

Abstract

This paper proposes a novel but simple method of measuring trend inflation by utilizing financial time series data. The idea is that inflation and financial conditions share a common stochastic trend. The study shows that this common trend has a statistically significant power in predicting future inflation in Japan. The proposed method outperforms other measures of core inflation in many cases because it eliminates transitory inflation fluctuations and captures the slow-moving changes in inflation.

Keywords

Inflation; Stochastic trend; Cointegration; Financial market; Forecasting

JEL Classification

C32, E31, E32, E52, E58

Inquiries

Masahiko SHIBAMOTO
Research Institute for Economics and Business Administration (RIEB)
Center for Computational Social Science (CCSS)
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059