Inflation Targeting, the Natural Rate and Expectations

David Kiefer

Working Paper Series, Department of Economics, University of Utah from University of Utah, Department of Economics

Abstract: In the new Keynesian model of endogenous stabilization governments have objectives with respect to macroeconomic performance, but are constrained by an augmented Phillips curve. Because they react quickly to inflation shocks, governments can lean against the macroeconomic wind. We develop an econometric test of this characterization of the political-economic equilibrium using the Kalman filter. Applying this methodology to a variety of quadratic social welfare functions, we find that an inflation target functional form is consistent with US history. We also find it more likely that expectations of inflation are adaptive, rather than rational.

Keywords: endogenous stabilization; policy objectives; adaptive expectations (search for similar items in EconPapers)
JEL-codes: E61 E63 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2008
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:uta:papers:2008_03

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