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

Haroon Mumtaz and Konstantinos Theodoridis ()

No E2018/1, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

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 and long-term interest rates in the US and the industrialised world. 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; international (search for similar items in EconPapers)
JEL-codes: C5 E1 E5 E6 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2018-01
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Working Paper: The Federal Reserve’s implicit inflation target and Macroeconomic dynamics. A SVAR analysis (2017) Downloads
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