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Time-varying inflation targeting after the nineties

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  • Lafuente, Juan A.
  • Pérez, Rafaela
  • Ruiz, Jesús

Abstract

This paper provides empirical evidence on monetary policy making for the US, the UK and the EMU using the decomposition in persistent and transitory monetary shocks proposed in Andolfatto, Hendry, and Moran [Journal of Monetary Economics 55 (2008) 406–422]. We use the particle filter to overcome the non-optimality of the Kalman filter that arises as a consequence of the nonlinear dynamics for the time evolution of monetary shocks. This estimating procedure allows us to estimate all the parameters involved in the monetary policy, providing an alternative way to calibration. We present empirical evidence for the US, the UK and the EMU to show the potential applicability of our estimation method. Our findings show that the evidence of a regime change in US monetary policy making from 1997 to 2001 is weak. However, September eleven and the recession that started in the second quarter of 2001 emerge as events that probably led to regime shifts in US monetary policy making. Also the mortgage subprime crisis is another key event affecting the central bank's decisions worldwide. We show that the use of a Taylor rule with time-varying responses in accordance with a Markov-switching setting leads to empirical findings consistent with those obtained with the particle filter.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 29 (2014)
Issue (Month): C ()
Pages: 400-408

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Handle: RePEc:eee:reveco:v:29:y:2014:i:c:p:400-408

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Web page: http://www.elsevier.com/locate/inca/620165

Related research

Keywords: Monetary shocks; Particle filter; Inflation target; Taylor rule;

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References

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  1. David Andolfatto & Scott Hendry & Kevin Moran, 2005. "Are Inflation Expectations Rational?," Macroeconomics 0501002, EconWPA.
  2. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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  4. Durbin, James & Koopman, Siem Jan, 2012. "Time Series Analysis by State Space Methods: Second Edition," OUP Catalogue, Oxford University Press, number 9780199641178, September.
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  9. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
  10. Juan Rubio-Ramirez & Jesus Fernandez-Villaverde & Pablo A. Guerron-Quintana, 2010. "Fortune or Virtue: Time Variant Volatilities versus Parameter Drifting in U.S. Data," 2010 Meeting Papers 270, Society for Economic Dynamics.
  11. Rhee, Hyuk Jae & Turdaliev, Nurlan, 2013. "Central bank transparency: Does it matter?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 183-197.
  12. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  13. Seth Pruitt, 2008. "Uncertainty over models and data: the rise and fall of American inflation," International Finance Discussion Papers 962, Board of Governors of the Federal Reserve System (U.S.).
  14. Mehdi Mostaghimi, 2004. "Monetary policy, composite leading economic indicators and predicting the 2001 recession," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(7), pages 463-477.
  15. Assenmacher-Wesche, Katrin, 2006. "Estimating Central Banks' preferences from a time-varying empirical reaction function," European Economic Review, Elsevier, vol. 50(8), pages 1951-1974, November.
  16. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
  17. Fernandez, Adriana Z. & Koenig, Evan F. & Nikolsko-Rzhevskyy, Alex, 2010. "Can alternative Taylor-rule specifications describe Federal Reserve policy decisions?," Journal of Policy Modeling, Elsevier, vol. 32(6), pages 733-757, November.
  18. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
  19. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series 2003-36, Board of Governors of the Federal Reserve System (U.S.).
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