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Changes in the Federal Reserve's Inflation Target: Causes and Consequences

Peter N. Ireland
Journal of Money, Credit and Banking
Vol. 39, No. 8 (Dec., 2007), pp. 1851-1882
Published by: Wiley
Stable URL: http://www.jstor.org/stable/25096225
Page Count: 32
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Changes in the Federal Reserve's Inflation Target: Causes and Consequences
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Abstract

This paper estimates a New Keynesian model to draw inferences about the behavior of the Federal Reserve's unobserved inflation target. The results indicate that the target rose from 1 1/4% in 1959 to over 8% in the mid to late 1970s before falling back below 2 1/2% in 2004. The results also provide some support for the hypothesis that over the entire post-war period, Federal Reserve policy has systematically translated short-run price pressures set off by supply-side shocks into more persistent movements in inflation itself, although considerable uncertainty remains about the true source of shifts in the inflation target.

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