Monetary Policy, Inflation Target, and the Great Moderation: An Empirical Investigation

This paper estimates a New Keynesian model with trend inflation and contrasts Taylor rules featuring fixed versus timevarying inflation target. The estimation is conducted over the Great Inflation and the Great Moderation periods, while allowing for indeterminacy. Time-varying inflation target empirically fits better and active monetary policy prevails in both periods, thereby ruling out sunspots as an explanation of the Great Inflation episode.

Authors

• Qazi Haque

JEL codes

• C11
• C52
• C62
• E31
• E32
• E52