What does the yield curve tell us about the Federal Reserve's implicit inflation target?
By: Taeyoung Doh.
Contributors: Federal Reserve Bank of Kansas City. Research Division.
Series: RWP -- 07-10
Publisher: Research Division, Federal Reserve Bank of Kansas City
Published: 2007
Place of publication: Kansas City [Mo.]
Language: eng
Format: Electronic resource
Description: This paper studies the time variation of the Federal Reserve's inflation target between 1960 and 2004 using both macro and yield curve data. I estimate a New Keynesian dynamic stochastic general equilibrium model in which the inflation target follows a random-walk process. I compare estimation results obtained from both macroeconomic and yield curve data, two estimates obtained with only macro data, in order to determine what the yield curve tells us about the inflation target. In the joint estimation, the estimated inflation target is much higher during the mid 1980s than in the corresponding macro estimation. Also, some part of the decline in the inflation target during the early or the mid 1980s seems to be perceived as temporary when private agents have to filter out the random walk part of the inflation target from the composite inflation target. My findings suggest that financial market participants were skeptical of the Fed's commitment to low inflation even after the Volcker disinflation period of the early 1980s.
Notes: Title from PDF file (viewed on Dec. 27, 2007).

"December 2007."

Includes bibliographical references.

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