Explaining Inflation-Gap Persistence by a Time-Varying Taylor Rule
Journal of Macroeconomics, Forthcoming
University of Heidelberg, Department of Economics, Discussion Paper No. 521
20 Pages Posted: 7 Nov 2010 Last revised: 1 Mar 2012
Date Written: February 1, 2012
Abstract
In a simple New Keynesian model, we derive a closed form solution for the inflation-gap persistence parameter as a function of the policy weights in the central bank’s Taylor rule. By estimating the time-varying weights that the FED attaches to inflation and the output gap, we show that the empirically observed changes in U.S. inflation-gap persistence during the period 1975 to 2010 can be well explained by changes in the conduct of monetary policy. Our findings are in line with Benati’s (2008) view that inflation persistence should not be considered a structural parameter in the sense of Lucas.
Keywords: inflation persistence, Great Moderation, monetary policy, New Keynesian model, Taylor rule
JEL Classification: C22, E31, E52, E58
Suggested Citation: Suggested Citation