Explaining inflation-gap persistence by a Time-Varying Taylor rule

Christian Conrad and Thomas A. Eife

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.

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Year of publication:	January 2012 ; This draft: January 2012
Authors:	Conrad, Christian ; Eife, Thomas A.
Publisher:	Heidelberg : Univ., Dep. of Economics Heidelberg : Universitätsbibliothek der Universität Heidelberg
Subject:	inflation-gap persistence \| Great Moderation \| monetary policy \| New Keynesian model \| Taylor rule \| Inflation \| Hysterese \| Hysteresis \| Geldpolitik \| Monetary policy \| Taylor-Regel \| Neoklassische Synthese \| Neoclassical synthesis \| Schätzung \| Estimation \| USA \| United States \| 1975-2010