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

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  • Haroon Mumtaz
  • Konstantinos Theodoridis

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, GDP growth and long-term interest rates. 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.

Suggested Citation

  • Haroon Mumtaz & Konstantinos Theodoridis, 2017. "The Federal Reserve’s implicit inflation target and Macroeconomic dynamics. A SVAR analysis," Working Papers 173173908, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:173173908
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    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2017_015.pdf
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    References listed on IDEAS

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