Research Discussion Papers, Bank of Finland
No 20/2008:
Estimating regime-switching Taylor rules with trend inflation
Efrem Castelnuovo ()
, Luciano Greco ()
and Davide Raggi ()
Abstract: This paper estimates regime-switching monetary policy
rules featuring trend inflation using post-WWII US data. We find evidence
in favour of regime shifts and time-variation of the inflation target. We
also find a drop in the inflation gap persistence when entering the Great
Moderation sample. Estimated Taylor rule parameters and regimes are robust
across different monetary policy models. We propose an ‘internal
consistency’ test to discriminate among our estimated rules. Such a test
relies upon a feedback mechanism running from the monetary policy stance to
the inflation gap. Our results support the stochastic autoregressive
process as the most consistent model for trend inflation, above all when
conditioning to the post-1985 subsample.
Keywords: active and passive Taylor rules; trend inflation; inflation gap persistence; Markov-switching models; (follow links to similar papers)
JEL-Codes: E52; E61; E62; (follow links to similar papers)
40 pages, September 10, 2008
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