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Time-varying inflation targeting after the nineties

  • Lafuente, Juan A.
  • Pérez, Rafaela
  • Ruiz, Jesús

This paper provides empirical evidence on monetary policy making for the US, the UK and the EMU using the decomposition in persistent and transitory monetary shocks proposed in Andolfatto, Hendry, and Moran [Journal of Monetary Economics 55 (2008) 406–422]. We use the particle filter to overcome the non-optimality of the Kalman filter that arises as a consequence of the nonlinear dynamics for the time evolution of monetary shocks. This estimating procedure allows us to estimate all the parameters involved in the monetary policy, providing an alternative way to calibration. We present empirical evidence for the US, the UK and the EMU to show the potential applicability of our estimation method. Our findings show that the evidence of a regime change in US monetary policy making from 1997 to 2001 is weak. However, September eleven and the recession that started in the second quarter of 2001 emerge as events that probably led to regime shifts in US monetary policy making. Also the mortgage subprime crisis is another key event affecting the central bank's decisions worldwide. We show that the use of a Taylor rule with time-varying responses in accordance with a Markov-switching setting leads to empirical findings consistent with those obtained with the particle filter.

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Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 29 (2014)
Issue (Month): C ()
Pages: 400-408

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Handle: RePEc:eee:reveco:v:29:y:2014:i:c:p:400-408
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620165

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  1. Fernández-Villaverde, Jesús & Guerron-Quintana, Pablo A. & Rubio-Ramírez, Juan Francisco, 2010. "Fortune or Virtue: Time-Variant Volatilities Versus Parameter Drifting in U.S. Data," CEPR Discussion Papers 7813, C.E.P.R. Discussion Papers.
  2. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  3. Fernández-Villaverde, Jesús & Rubio-Ramírez, Juan Francisco, 2006. "Estimating Macroeconomic Models: A Likelihood Approach," CEPR Discussion Papers 5513, C.E.P.R. Discussion Papers.
  4. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
  5. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
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  7. David Andolfatto & Scott Hendry & Kevin Moran, 2007. "Are Inflation Expectations Rational?," Working Paper Series 27-07, The Rimini Centre for Economic Analysis.
  8. Seth Pruitt, 2012. "Uncertainty Over Models and Data: The Rise and Fall of American Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 341-365, 03.
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  11. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series 2003-36, Board of Governors of the Federal Reserve System (U.S.).
  12. Assenmacher-Wesche, Katrin, 2006. "Estimating Central Banks' preferences from a time-varying empirical reaction function," European Economic Review, Elsevier, vol. 50(8), pages 1951-1974, November.
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  15. Mehdi Mostaghimi, 2004. "Monetary policy, composite leading economic indicators and predicting the 2001 recession," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(7), pages 463-477.
  16. Wilde, Wolfram, 2012. "The influence of Taylor rule deviations on the real exchange rate," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 51-61.
  17. Rhee, Hyuk Jae & Turdaliev, Nurlan, 2013. "Central bank transparency: Does it matter?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 183-197.
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  20. Spanjers, Willy, 2008. "Central banks and ambiguity," International Review of Economics & Finance, Elsevier, vol. 17(1), pages 85-102.
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