Hi,

I have a log-linearized model to estimate. I have a problem with observing inflation. The data is the deviation of inflation from the target ( which is 5% on annual basis adjusted for quarter). But the mean of the data is higher ( which is 9% on annual basis adjusted for quarter). I observed data is not demeaned. There is no explicit inflation target in practice for the selected country. But, some studies on this country suggest to consider 5% as the implicit target. I have mentioned the observation equation as follows.

pi_obs=pi_hat;

The target of 5% is given as a parameter pi_bar. I think there is something going wrong.

What happens to the mean in the observed data. Should I adjusted the observation equation? or demean the deviation of inflation from target data?

Please respond. The model didnâ€™t generate any error message and the model also converges in the current set up. Please let me know whether I am missing something.

Thank you very much for any suggestion.

Sujee