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Explaining Inflation-Gap Persistence by a Time-Varying Taylor Rule

Conrad, Christian and Eife, Thomas A.

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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.

Item Type: Working paper
Date Deposited: 17. Feb 2012 09:26
Date: 2012
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: inflation-gap persistence , Great Moderation , monetary policy , New Keynesian model , Taylor rule
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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