Policy Rules, Regime Switches, and Trend Inflation: An Empirical Investigation for the U.S.

This paper estimates Taylor rules featuring instabilities in policy parameters and switches in policy shocks’volatility for the post-WWII U.S. economy. We contrast a rule embedding a fi…xed-in‡flation target with another featuring trend inflation, i.e. a time-varying inflation target. The rule embedding trend inflation turns out to be a) empirically superior according to a marginal likelihood-based comparison, and b) more able to pin down some relevant episodes of the post-WWII U.S. monetary policy history. Estimates conducted with Greenbook data confirm the empirical superiority of the rule featuring a time-varying inflation target. A comparison with recently published estimates of trend inflation is also conducted.