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

See all articles by Christian Conrad

Christian Conrad

Heidelberg University - Alfred Weber Institute for Economics; ETH Zürich - KOF Swiss Economic Institute

Thomas A. Eife

Heidelberg University - Alfred Weber Institute for Economics

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

Conrad, Christian and Eife, Thomas Albert, Explaining Inflation-Gap Persistence by a Time-Varying Taylor Rule (February 1, 2012). Journal of Macroeconomics, Forthcoming, University of Heidelberg, Department of Economics, Discussion Paper No. 521 , Available at SSRN: https://ssrn.com/abstract=1703350 or http://dx.doi.org/10.2139/ssrn.1703350

Christian Conrad (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics ( email )

Bergheimer Strasse 58
Heidelberg, D-69115
Germany
+49 (06)221 543173 (Phone)

HOME PAGE: http://www.uni-heidelberg.de/conrad

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Thomas Albert Eife

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

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