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The Federal Reserve’s implicit inflation target and Macroeconomic dynamics. A SVAR analysis

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Abstract

This paper identifies shocks to the Federal Reserve's inflation target as VAR innovations that make the largest contribution to future movements in long-horizon inflation expectations. The effectiveness of this scheme is documented via Monte-Carlo experiments. The estimated impulse responses indicate that a positive shock to the target is associated with a large increase in inflation and long-term interest rates in the US and the industrialised world. Target shocks are estimated to be a vital factor behind the increase in inflation during the pre-1980 period and are an important driver of the decline in long-term interest rates over the last two decades.

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  • Mumtaz, Haroon & Theodoridis, Konstantinos, 2018. "The Federal Reserve’s implicit inflation target and Macroeconomic dynamics. A SVAR analysis," Cardiff Economics Working Papers E2018/1, Cardiff University, Cardiff Business School, Economics Section.
  • Handle: RePEc:cdf:wpaper:2018/1
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    More about this item

    Keywords

    SVAR; DSGE model; inflation target; international;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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