A Note on the Choice of Inflation Rate Series and Its Impact on Empirical Policy Frontier Estimation

Dominik Kavřík ()
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Dominik Kavřík: Prague University of Economics and Business

A chapter in New Perspectives and Paradigms in Applied Economics and Business, 2025, pp 57-70 from Springer

Abstract: Abstract Monetary policy efficiency frontier is given by the direction of the relationship between the variance of inflation and the variance of the output gap. Researchers studying this frontier rely on a certain measure of the inflation rate. Given the nature of monetary policy, assuming annual inflation targeting, it might seem natural to use the year-on-year rate of inflation to study deviations from the target. The concept known as the Taylor Curve even incorporates the target such that the deviations of inflation from its target enter the analysis of the trade-off existence between the variances. Year-on-year inflation, however, might not have suitable statistical properties. It might present spurious cycles that interfere with further analysis. This study shows the effect of using the year-on-year rate of inflation compared to quarter-to-quarter inflation and its impact on the conclusion about the variance trade-off analysis using data from the United States, mainly on its responsiveness to economic conditions.

Keywords: Monetary policy; Inflation rate; Efficiency frontier (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-3-031-77363-1_5

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DOI: 10.1007/978-3-031-77363-1_5

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