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Changes in the Federal Reserve's inflation target: causes and consequences

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Peter N. Ireland

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Abstract

This paper estimates a New Keynesian model to draw inferences about the behavior of the Federal Reserve’s unobserved inflation target. The results indicate that the target rose from 1- 1/4 percent in 1959 to over 8 percent in the mid-to-late 1970s before falling back below 2-1/2 percent in 2004. The results also provide some support for the hypothesis that over the entire postwar period, Federal Reserve policy has systematically translated short-run price pressures set off by supply-side shocks into more persistent movements in inflation itself, although considerable uncertainty remains about the true source of shifts in the inflation target.

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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 05-13.

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Date of creation: 2005
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Handle: RePEc:fip:fedbwp:05-13

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Keywords: Inflation (Finance) Monetary policy

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