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POLICY RULES, REGIME SWITCHES, AND TREND INFLATION: AN EMPIRICAL INVESTIGATION FOR THE UNITED STATES

Published online by Cambridge University Press:  20 November 2012

Efrem Castelnuovo ,
Luciano Greco  and
Davide Raggi
Efrem Castelnuovo*
Affiliation:
University of Padua and Bank of Finland
Luciano Greco
Affiliation:
University of Padua
Davide Raggi
Affiliation:
University of Bologna and Johns Hopkins University (SAIS Centre)
*
Address correspondence to: Efrem Castelnuovo, University of Padua and Bank of Finland, via del Santo 33, I-35123; e-mailt: efrem.castelnuovo@unipd.it.
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Abstract

This paper estimates Taylor rules featuring instabilities in policy parameters and switches in policy shocks’ volatility for the post-World War II (WWII) U.S. economy. We contrast a rule embedding a fixed-inflation target with another featuring trend inflation, i.e., a time-varying inflation target. The rule embedding trend inflation turns out to be (a) empirically superior according to a marginal likelihood-based comparison and (b) more able to pin down some relevant episodes of the post-WWII U.S. monetary policy history. Estimates conducted with Greenbook data confirm the empirical superiority of the rule featuring a time-varying inflation target. A comparison with recently published estimates of trend inflation is also conducted.

Keywords

Policy SwitchesHeteroskedasticityTrend InflationInflation Gap PersistenceMarkov-Switching Models
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 4 , June 2014 , pp. 920 - 942
Copyright
Copyright © Cambridge University Press 2012 

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