Explaining Inflation Persistence by a Time-Varying Taylor Rule
AbstractIn a simple New Keynesian model, we derive a closed form solution for the inflation persistence parameter as a function of the policy weights in the central bank’s Taylor rule. By estimating the time-varying weights that the FED attaches to inflation and the output gap, we show that the empirically observed changes in U.S. inflation persistence during the period 1975 to 2010 can be well explained by changes in the conduct of monetary policy. Our findings are in line with Benati’s (2008) view that inflation persistence should not be considered a structural parameter in the sense of Lucas.
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Bibliographic InfoPaper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0504.
Date of creation: 16 Sep 2010
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inflation persistence; Great Moderation; monetary policy; New Keynesian model; Taylor rule;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-25 (All new papers)
- NEP-CBA-2010-09-25 (Central Banking)
- NEP-MAC-2010-09-25 (Macroeconomics)
- NEP-MON-2010-09-25 (Monetary Economics)
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