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.