Explaining Inflation Persistence by a Time-Varying Taylor Rule

Christian Conrad and Thomas Eife ()

No 504, Working Papers from University of Heidelberg, Department of Economics

Abstract: In a simple New Keynesian model, we derive a closed form solution for the inflation 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 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.

Keywords: inflation persistence; Great Moderation; monetary policy; New Keynesian model; Taylor rule (search for similar items in EconPapers)
Date: 2010-09-16
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:awi:wpaper:0504

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