Explaining inflation-gap persistence by a time-varying Taylor rule

In a simple New Keynesian model, we derive a closed form solution for the inflation-gap persistence parameter as a function of the policy weights in the central bank's Taylor rule. By estimating the time-varying weights that the FED attaches to inflation and the output gap, we show that the empirically observed changes in US inflation-gap persistence during the period 1975-2010 can be well explained by changes in the conduct of monetary policy. Our findings are in line with Benati's (2008) view that inflation persistence should not be considered a structural parameter in the sense of Lucas. (C) 2012 Elsevier Inc. All rights reserved.