Trend inflation and inflation expectations in high dimensional vector autoregressions

Dimitris Louzis
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Dimitris Louzis: Bank of Greece

No 360, Working Papers from Bank of Greece

Abstract: This paper introduces a new class of large vector autoregression (VAR) models with a hybrid trend structure that explicitly incorporates both trend inflation and inflation expectations, proxied by long-term survey forecasts and statistical filters. We develop efficient Bayesian estimation methods leveraging recent advances in matrix precision algorithms, substantially reducing computational costs and enabling large-scale forecasting exercises. Using a dataset of 20 U.S. macroeconomic variables, we show that incorporating trend inflation and survey-based expectations within a high-dimensional VAR framework markedly improves inflation forecast accuracy relative to widely used large-VAR benchmarks.

Keywords: Inflation Forecasting; Survey-Based Inflation Expectations; Large-Cross Section; Efficient MCMC algorithms (search for similar items in EconPapers)
JEL-codes: C51 C53 C55 E31 E37 (search for similar items in EconPapers)
Pages: 35
Date: 2026-03
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Persistent link: https://EconPapers.repec.org/RePEc:bog:wpaper:360

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