Castelnuovo E., Greco L., Raggi D. (2010).
Policy Rules, Regime Switches, and Trend Inflation: An Empirical Investigation for the U.S..Working Papers 691, Dipartimento Scienze Economiche, Universita’ di Bologna.
This paper estimates Taylor rules featuring instabilities in policy parameters, switches in policy shocks’ volatility, and time-varying trend inflation using post-WWII U.S. data. The model embedding the stochastic target performs better in terms of data-fit and identification of the changes in the FOMC’s chairmanships. Policy breaks are found not to be synchronized with variations in policy shocks’ volatilities. Finally, we detect a negative correlation between systematic monetary policy aggressiveness and inflation gap persistence.