The Federal Reserve’s implicit inflation target and Macroeconomic dynamics. A SVAR analysis

Haroon Mumtaz and Konstantinos Theodoridis

No 173173908, Working Papers from Lancaster University Management School, Economics Department

Abstract: This paper identifies shocks to the Federal Reserve's inflation target as VAR innovations that make the largest contribution to future movements in long-horizon inflation expectations. The effectiveness of this scheme is documented via Monte-Carlo experiments. The estimated impulse responses indicate that a positive shock to the target is associated with a large increase in inflation, GDP growth and long-term interest rates. Target shocks are estimated to be a vital factor behind the increase in inflation during the pre-1980 period and are an important driver of the decline in long-term interest rates over the last two decades.

Keywords: SVAR; DSGE model; inflation target (search for similar items in EconPapers)
JEL-codes: C5 E1 E5 E6 (search for similar items in EconPapers)
Date: 2017
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:lan:wpaper:173173908

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