Estimating the Implicit Inflation Target : An Application to U.S. Monetary Policy

This paper proposes a new method of estimating the Taylor rule with a time-varying implicit inflation target and a time-varying natural rate of interest. The inflation target and the natural rate are modeled as random walks and are estimated using maximum likelihood and the Kalman filter. I apply this method to U.S. monetary policy over the past 25 years and find considerable time variation in the implicit target, confirming hypotheses about quot;opportunistic disinflationquot; and the recent quot;deflation scare.quot