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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)

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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Bibliographic 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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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

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

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References

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Cited by:
  1. Matthew Greenwood-Nimmo & Youngcheol Shin, 2011. "Shifting Preferences at the Fed: Evidence from Rolling Dynamic Multipliers and Impulse Response Analysis," Working Papers 2011-057, Madras School of Economics,Chennai,India.
  2. Barbara Rossi, 2011. "Advances in Forecasting Under Instability," Working Papers 11-20, Duke University, Department of Economics.
  3. António AFONSO & Priscilla TOFFANO, 2013. "Fiscal regimes in the EU," Center for Economic Studies - Discussion papers ces13.06, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  4. Castelnuovo, Efrem, 2010. "Trend inflation and macroeconomic volatilities in the post-WWII U.S. economy," The North American Journal of Economics and Finance, Elsevier, vol. 21(1), pages 19-33, March.
  5. Efrem Castelnuovo, 2006. "Tracking U.S. Inflation Expectations with Domestic and Global Indicators," "Marco Fanno" Working Papers 0031, Dipartimento di Scienze Economiche "Marco Fanno".

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