Estimating the Federal Reserve's implicit inflation target: A state space approach
Existing estimates of the Federal Reserve's implicit inflation target typically rely on the assumption that it is constant for the duration of the period of analysis. This paper relaxes this assumption and estimates the implicit inflation target using a time-varying parameter model and the Kalman filter. In applying this method to the Volcker-Greenspan period, it finds significant time variation in the implicit target that is consistent with hypotheses about 'opportunistic disinflation' and the recent 'deflation scare'.
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