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Estimating regime-switching Taylor rules with trend inflation

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Author Info
Castelnuovo , Efrem () (University of Padua and Bank of Finland Research)
Greco , Luciano () (University of Padua)
Raggi, Davide () (University of Bologna)

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Abstract

This paper estimates regime-switching monetary policy rules featuring trend inflation using post-WWII US data. We find evidence in favour of regime shifts and time-variation of the inflation target. We also find a drop in the inflation gap persistence when entering the Great Moderation sample. Estimated Taylor rule parameters and regimes are robust across different monetary policy models. We propose an ‘internal consistency’ test to discriminate among our estimated rules. Such a test relies upon a feedback mechanism running from the monetary policy stance to the inflation gap. Our results support the stochastic autoregressive process as the most consistent model for trend inflation, above all when conditioning to the post-1985 subsample.

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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 20/2008.

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Length: 40 pages
Date of creation: 10 Sep 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_020

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Related research
Keywords: active and passive Taylor rules; trend inflation; inflation gap persistence; Markov-switching models;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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References listed on IDEAS
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  1. Kinnunen, Helvi, 2008. "Government funds and demographic transition – alleviating ageing costs in a small open economy," Research Discussion Papers 21/2008, Bank of Finland. [Downloadable!]
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