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What Does the Yield Curve Tell Us about the Federal Reserve’s Implicit Inflation Target?

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  • TAEYOUNG DOH

Abstract

This paper studies the time variation of the Federal Reserve’s inflation target between 1960 and 2004 using both macro and yield curve data. I estimate a New Keynesian dynamic stochastic general equilibrium model in which the inflation target follows a random-walk process. I compare estimation results obtained from both macroeconomic and yield curve data, two estimates obtained with only macro data, in order to determine what the yield curve tells us about the inflation target. In the joint estimation, the estimated inflation target is much higher during the mid 1980s than in the corresponding macro estimation. Also, some part of the decline in the inflation target during the early or the mid 1980s seems to be perceived as temporary when private agents have to filter out the random walk part of the inflation target from the composite inflation target. My findings suggest that financial market participants were skeptical of the Fed’s commitment to low inflation even after the Volcker disinflation period of the early 1980s.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 44 (2012)
Issue (Month): (03)
Pages: 469-486

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Handle: RePEc:mcb:jmoncb:v:44:y:2012:i::p:469-486

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Peter N. Ireland, 2014. "Monetary Policy, Bond Risk Premia, and the Economy," Boston College Working Papers in Economics 852, Boston College Department of Economics.
  2. De Graeve, Ferre & Emiris, Marina & Wouters, Raf, 2009. "A structural decomposition of the US yield curve," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 545-559, May.
  3. Daniel Burren, 2010. "The Term Structure of Interest Rates in a New Keynesian Model with Time-Varying Macro Volatility," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 277-299, November.

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