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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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