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

Author/Editor:

Daniel Leigh

Publication Date:

April 1, 2005

Electronic Access:

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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. 2005/077

Subject:

Disinflation Estimation techniques Inflation Inflation targeting Output gap

English

Publication Date:

April 1, 2005

ISBN/ISSN:

9781451860962/1018-5941

Stock No:

WPIEA2005077

Pages:

24

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