Inflation Targeting, the Natural Rate and Expectations
AbstractIn the new Keynesian model of endogenous stabilization governments have objectives with respect to macroeconomic performance, but are constrained by an augmented Phillips curve. Because they react quickly to inflation shocks, governments can lean against the macroeconomic wind. We develop an econometric test of this characterization of the political-economic equilibrium using the Kalman filter. Applying this methodology to a variety of quadratic social welfare functions, we find that an inflation target functional form is consistent with US history. We also find it more likely that expectations of inflation are adaptive, rather than rational.
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Bibliographic InfoPaper provided by University of Utah, Department of Economics in its series Working Paper Series, Department of Economics, University of Utah with number 2008_03.
Length: 23 pages
Date of creation: 2008
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endogenous stabilization; policy objectives; adaptive expectations;
Find related papers by JEL classification:
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-26 (All new papers)
- NEP-CBA-2008-01-26 (Central Banking)
- NEP-MAC-2008-01-26 (Macroeconomics)
- NEP-MON-2008-01-26 (Monetary Economics)
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