Explaining Inflation Persistence by a Time-Varying Taylor Rule

In a simple New Keynesian model, we derive a closed form solution for the inflationpersistence parameter as a function of the policy weights in the central bank’s Taylorrule. By estimating the time-varying weights that the FED attaches to inflationand the output gap, we show that the empirically observed changes in U.S. inflationpersistence during the period 1975 to 2010 can be well explained by changes in theconduct of monetary policy. Our findings are in line with Benati’s (2008) view thatinflation persistence should not be considered a structural parameter in the senseof Lucas.[...]