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Estimating regime-switching Taylor rules with trend inflation

  • Castelnuovo, Efrem

    ()

    (University of Padua and Bank of Finland Research)

  • Greco, Luciano

    ()

    (University of Padua)

  • Raggi, Davide

    ()

    (University of Bologna)

This paper estimates regime-switching monetary policy rules featuring trend inflation using post-WWII US data. We find evidence in favour of regime shifts and time-variation of the inflation target. We also find a drop in the inflation gap persistence when entering the Great Moderation sample. Estimated Taylor rule parameters and regimes are robust across different monetary policy models. We propose an ‘internal consistency’ test to discriminate among our estimated rules. Such a test relies upon a feedback mechanism running from the monetary policy stance to the inflation gap. Our results support the stochastic autoregressive process as the most consistent model for trend inflation, above all when conditioning to the post-1985 subsample.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0820netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 20/2008.

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Length: 40 pages
Date of creation: 10 Sep 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_020
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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