Estimating the Implicit Inflation Target: An Application to U.S. Monetary Policy
25 Pages Posted: 3 Mar 2006
Date Written: April 2005
Abstract
This paper proposes a new method of estimating the Taylor rule with a time-varying implicit inflation target and a time-varying natural rate of interest. The inflation target and the natural rate are modeled as random walks and are estimated using maximum likelihood and the Kalman filter. I apply this method to U.S. monetary policy over the past 25 years and find considerable time variation in the implicit target, confirming hypotheses about "opportunistic disinflation" and the recent "deflation scare."
Keywords: Taylor rule, time-varying parameters, Kalman filter
JEL Classification: C22, E31, E52
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Why Has U.S. Inflation Become Harder to Forecast?
By James H. Stock and Mark W. Watson
-
The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time
-
The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time
-
Phillips Curve Inflation Forecasts
By James H. Stock and Mark W. Watson
-
Has Output Become More Predictable? Changes in Greenbook Forecast Accuracy
By Peter Tulip
-
Measuring Inflation Persistence: A Structural Time Series Approach
By Gerdie Everaert and Maarten Dossche
-
Measuring Inflation Persistence: A Structural Time Series Approach
By Maarten Dossche and Gerdie Everaert
-
How Accurate are Real-Time Estimates of Output Trends and Gaps?