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Time-Varying Inflation Target and Unbiased Taylor Rule Estimation

Author

Listed:
  • Joshua Brault

    (Bank of Canada)

  • Qazi Haque

    (University of Adelaide)

  • Louis Phaneuf

    (University of Quebec in Montreal)

Abstract

Taylor rule estimation can be biased if the central bank's inflation target is counterfactually held fixed. First, we identify in the standard New Keynesian model a downward bias affecting the OLS estimate of the policy response to inflation. Based on simulations from a similar model with positive trend inflation, we show that the policy response to inflation is nearly half the true value with large inflation target fluctuations, as purportedly exhibited by the Fed during the 1960s and 1970s. Second, we implement a procedure for estimating DSGE models using a novel population-based MCMC routine known as parallel tempering. Applying this procedure to a medium-scale DSGE model with positive trend inflation, we do not find evidence of a bias when jointly estimating model parameters and the unobserved time-varying inflation target.

Suggested Citation

  • Joshua Brault & Qazi Haque & Louis Phaneuf, 2025. "Time-Varying Inflation Target and Unbiased Taylor Rule Estimation," Working Papers 25-01, Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management, revised Jan 2025.
    • Handle: RePEc:bbh:wpaper:25-01
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    File URL: https://chairemacro.esg.uqam.ca/wp-content/uploads/sites/146/Taylor_Rule_Estimates.pdf
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    More about this item

    Keywords

    Unbiased Taylor rule estimation; time-varying inflation target; parallel tempering algorithm; DSGE models; Positive Trend Inflation;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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