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Explaining inflation-gap persistence by a time-varying Taylor rule

  • Conrad, Christian
  • Eife, Thomas A.

In a simple New Keynesian model, we derive a closed form solution for the inflation-gap persistence parameter as a function of the policy weights in the central bank’s Taylor rule. By estimating the time-varying weights that the FED attaches to inflation and the output gap, we show that the empirically observed changes in US inflation-gap persistence during the period 1975–2010 can be well explained by changes in the conduct of monetary policy. Our findings are in line with Benati’s (2008) view that inflation persistence should not be considered a structural parameter in the sense of Lucas.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 2 ()
Pages: 419-428

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Handle: RePEc:eee:jmacro:v:34:y:2012:i:2:p:419-428
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  2. Timothy Cogley & Thomas J. Sargent, 2003. "Drifts and volatilities: monetary policies and outcomes in the post WWII U.S," FRB Atlanta Working Paper 2003-25, Federal Reserve Bank of Atlanta.
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  17. Perron, P., 1989. "Testing For A Unit Root In A Time Series With A Changing Mean," Papers 347, Princeton, Department of Economics - Econometric Research Program.
  18. Taeyoung Doh & Troy Davig, 2009. "Monetary Policy Regime Shifts and Inflation Persistence," 2009 Meeting Papers 182, Society for Economic Dynamics.
  19. Levin, Andrew T. & Piger, Jeremy M., 2004. "Is inflation persistence intrinsic in industrial economies?," Working Paper Series 0334, European Central Bank.
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  23. Molodtsova, Tanya & Nikolsko-Rzhevskyy, Alex & Papell, David H., 2008. "Taylor rules with real-time data: A tale of two countries and one exchange rate," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages S63-S79, October.
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