The Inflation Aversion of the Bundesbank: A State Space Approach

Vladimir Kuzin

No 121, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: A simple backward-looking Taylor rule is estimated in a time-varying coefficient framework with quarterly German data for the period 1975-1998. Markov switching models and the Kalman Filter are used to extract the unobservable paths of the coefficients. The main finding is that the inflation aversion of the Bundesbank was not constant over time and exhibits some sudden and large shifts during the period of monetary targeting. There are phases with low and with high inflation aversion. This could for example explain why the estimated value of the inflation coefficient in backward-looking Taylor rules often does not exceed one and so violates the implications of theoretical monetary policy models. Moreover, the results provide evidence that the Bundesbank followed the so-called "opportunistic approach" to disinflation

Keywords: Taylor rule; state space models; Markov switching models; Kalman Filter (search for similar items in EconPapers)
JEL-codes: C22 E58 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-cba and nep-mon
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Citations: View citations in EconPapers (2)

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