Policy Rules, Regime Switches, and Trend Inflation: An Empirical Investigation for the U.S.
35 Pages Posted: 23 Sep 2010
Date Written: September 22, 2010
This paper estimates Taylor rules featuring instabilities in policy parameters, switches in policy shocks' volatility, and time-varying trend inflation using post-WWII U.S. data. The model embedding the stochastic target performs better in terms of data-fit and identification of the changes in the FOMC's chairmanships. Policy breaks are found not to be synchronized with variations in policy shocks' volatilities. Finally, we detect a negative correlation between systematic monetary policy aggressiveness and inflation gap persistence.
Keywords: Policy switches, heteroskedasticity, trend inflation, inflation gap persistence, Markov-Switching models
JEL Classification: E52, E61, E62
Suggested Citation: Suggested Citation