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

Author/Editor: Leigh, Daniel
Authorized for Distribution: April 1, 2005
Electronic Access: Free Full Text (PDF file size is 483KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

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."
 
Series: Working Paper No. 05/77
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
 
English  
    Published:   April 1, 2005        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2005077   Pages:   24
    Price:   US$15.00
       
     
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