Haaron Mumtaz (Queen Mary University of London): The Federal Reserve’s implicit inflation target and macroeconomic dynamics: a SVAR analysis

Haaron Mumtaz (Queen Mary University of London): The Federal Reserve’s implicit inflation target and macroeconomic dynamics: a SVAR analysis

Co-author: Konstantinos Theodoridis

Abstract

This paper identi…es shocks to the Federal Reserve’s infl‡ation target as VAR innovations that make the largest contribution to future movements in long-horizon infl‡ation 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 infl‡ation 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 infl‡ation during the pre-1980 period and are an important driver of the decline in long-term interest rates over the last two decades.

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