What does the yield curve tell us about the Federal Reserve's implicit inflation target?

Taeyoung Doh

No RWP 07-10, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper studies the time variation of the Federal Reserve?s inflation target between 1960 and 2004 using both macro and yield curve data. I estimate a New Keynesian dynamic stochastic general equilibrium model in which the inflation target follows a random-walk process. I compare estimation results obtained from both macroeconomic and yield curve data, two estimates obtained with only macro data, in order to determine what the yield curve tells us about the inflation target. In the joint estimation, the estimated inflation target is much higher during the mid 1980s than in the corresponding macro estimation. Also, some part of the decline in the inflation target during the early or the mid 1980s seems to be perceived as temporary when private agents have to filter out the random walk part of the inflation target from the composite inflation target. My findings suggest that financial market participants were skeptical of the Fed?s commitment to low inflation even after the Volcker disinflation period of the early 1980s.

Keywords: Interest rates; Inflation (Finance) (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: What Does the Yield Curve Tell Us about the Federal Reserve’s Implicit Inflation Target? (2012)
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