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What Does the Yield Curve Tell Us about the Federal Reserve’s Implicit Inflation Target?
Author(s) -
DOH TAEYOUNG
Publication year - 2012
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2011.00496.x
Subject(s) - dynamic stochastic general equilibrium , inflation (cosmology) , economics , monetary policy , yield curve , perfect information , econometrics , yield (engineering) , output gap , phillips curve , imperfect , inflation targeting , taylor rule , interest rate , monetary economics , central bank , mathematical economics , linguistics , philosophy , physics , materials science , theoretical physics , metallurgy
This paper uses a dynamic stochastic general equilibrium (DSGE) model to explore additional information that can be extracted from the yield curve about the Federal Reserve’s implicit inflation target. In the model, monetary policy follows a nominal interest rate rule with a drifting inflation target, and agents have imperfect information about the persistent component of the inflation target. When the yield curve information is included, the DSGE model generates inflation expectations that are highly correlated with survey data evidence. In the DSGE model, agents quickly learn the inflation target and the gap between the perceived target and the actual target is quantitatively small. This is in contrast to some existing studies that suggest a persistent role of imperfect information even as long‐run inflation expectations have declined and stabilized at a low level since the mid 1980s.