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The Inflation Aversion of the Bundesbank: A State Space Approach

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  • Vladimir Kuzin
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    Abstract

    A simple backward-looking Taylor rule is estimated in a time-varying coefficient framework with quarterly German data for the period 1975-1998. Markov switching models and the Kalman Filter are used to extract the unobservable paths of the coefficients. The main finding is that the inflation aversion of the Bundesbank was not constant over time and exhibits some sudden and large shifts during the period of monetary targeting. There are phases with low and with high inflation aversion. This could for example explain why the estimated value of the inflation coefficient in backward-looking Taylor rules often does not exceed one and so violates the implications of theoretical monetary policy models. Moreover, the results provide evidence that the Bundesbank followed the so-called "opportunistic approach" to disinflation

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    File URL: http://repec.org/sce2004/up.1134.1077722286.pdf
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    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 121.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:sce:scecf4:121

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    Keywords: Taylor rule; state space models; Markov switching models; Kalman Filter;

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    1. Gabriel Rodriguez, 2001. "Estimation of the Taylor Rule for Canada Under Multiple Structural Changes," Working Papers 0107E, University of Ottawa, Department of Economics.
    2. Cukierman, A., 1999. "The Inflation Bias Result Revisited," Papers 38-99, Tel Aviv.
    3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    4. Richard Clarida & Mark Gertler, 1996. "How the Bundesbank Conducts Monetary Policy," NBER Working Papers 5581, National Bureau of Economic Research, Inc.
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