Estimating the Implicit Inflation Target: An Application to U.S. Monetary Policy

Author/Editor: Leigh, Daniel
Publication Date: April 01, 2005
Summary: This paper proposes a new method of estimating the Taylor rule with a time-varying implicit inflation target and a time-varying natural rate of interest. The inflation target and the natural rate are modeled as random walks and are estimated using maximum likelihood and the Kalman filter. I apply this method to U.S. monetary policy over the past 25 years and find considerable time variation in the implicit target, confirming hypotheses about "opportunistic disinflation" and the recent "deflation scare."
Subject(s): Inflation targeting | United States | Monetary policy | Interest rates | Disinflation | Deflation | Economic models

Author's Keyword(s): Taylor rule | time-varying parameters | Kalman filter
Publication Date: April 01, 2005
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA2005077 Pages: 24
US$15.00 (Academic Rate:
US$15.00 )
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