Estimating the Implicit Inflation Target: An Application to U.S. Monetary Policy, Issues 2005-2077
International Monetary Fund, European Department, 2005 - Inflation (Finance) - 24 pages
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."
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90 percent confidence actual inflation approach to disinflation Athanasios Board of Governors central bank Clarida constant inflation target constant natural rate deflation scare double digits Eggertsson and Woodford Equation estimate the Taylor federal funds rate Federal Reserve Bank Federal Reserve Board Federal Reserve System follows a random FOMC Greenbook output gap implicit inflation target interest rate inertia Kalman filter Kenneth N Kuttner Laubach and Williams Log likelihood 63.7 mean zero i.i.d. Median Unbiased Estimation Monetary Policy Rules nominal interest rates obtain an estimate opportunistic approach Orphanides and Wilcox output gap data percent confidence interval policymakers potential GDP productivity growth qualitative historical evidence random walk rate of interest real federal funds real interest rate real rate gap real-time data Reducing Inflation Robustness Analysis sample Schorfheide signal-to-noise ratio supply shocks Taylor principle Taylor rule model Taylor rule parameters time-varying inflation target time-varying natural rate time-varying target U.S. Monetary Policy zero i.i.d. normal