Estimating the Implicit Inflation Target: An Application to U.S. Monetary Policy
April 1, 2005
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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."
Subject: Disinflation, Estimation techniques, Inflation, Inflation targeting, Output gap
Keywords: inflation target, rate of interest, WP
Pages:
24
Volume:
2005
DOI:
Issue:
077
Series:
Working Paper No. 2005/077
Stock No:
WPIEA2005077
ISBN:
9781451860962
ISSN:
1018-5941
