Policy Rules, Regime Switches, and Trend Inflation: An Empirical Investigation for the U.S.

35 Pages Posted: 23 Sep 2010

See all articles by Efrem Castelnuovo

Efrem Castelnuovo

University of Melbourne - Department of Economics

Luciano G. Greco

University of Padua - Department of Economics

Davide Raggi

University of Bologna - Department of Economics

Date Written: September 22, 2010

Abstract

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

Castelnuovo, Efrem and Greco, Luciano G. and Raggi, Davide, Policy Rules, Regime Switches, and Trend Inflation: An Empirical Investigation for the U.S. (September 22, 2010). Available at SSRN: https://ssrn.com/abstract=1680862 or http://dx.doi.org/10.2139/ssrn.1680862

Efrem Castelnuovo (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

HOME PAGE: http://https://sites.google.com/site/efremcastelnuovo/home

Luciano G. Greco

University of Padua - Department of Economics ( email )

via Del Santo 33
Padova, 35123
Italy

Davide Raggi

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
Bologna, 40126
Italy

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