Essays on empirical macroeconomics: Inflation and monetary policy

The three essays in this dissertation focus on various econometric issues related to the study of monetary policy and inflation dynamics. In the first essay, I propose a multivariate regime- switching model that includes a forward-looking Taylor rule and a generalized hybrid New Keynesian Phillips curve (NKPC) to perform a joint analysis of U.S. monetary policy and inflation. Direct measures of expectations from the Fed's Greenbook and survey data are applied to allow for information asymmetry between policymakers and the private sector. The empirical results show multiple structural breaks in 1979 and 1983. In contrast to the majority of univariate studies in the literature, the joint analysis suggests an interest rate policy that was stabilizing in accordance to the Taylor principle across periods. Furthermore, the pre-1979 economy was characterized by a policy rule that lacked a well-defined inflation target, and a generalized hybrid NKPC that was in part backward-looking. In the second essay, I develop a baseline unobserved components (UC) model as implied by the closed form solution of the forward-looking NKPC in the presence of stochastic trend inflation. To treat the output gap as unobserved, the baseline case is also extended to a bivariate UC model of real output and inflation. With the exception of the 1970s period, empirical results show that once time variation in trend inflation is taken into account, the forward-looking NKPC becomes a good description of U.S. inflation dynamics. In the third essay, I propose an alternative monetary policy reaction with a time-varying inflation target based on the forward-looking Taylor rule in the presence of unit roots in the federal funds rate and inflation. During estimation, one unknown structural break is incorporated into the monetary policy rule. In addition, problems of endogeneity that arise from using trend inflation estimates to replace the Fed's implicit inflation target and ex-post data to measure policymakers' expectations are explicitly taken into account. Empirical results show that once a time-varying inflation target is included into the forward-looking Taylor rule, U.S. monetary policy in the pre-1979 economy can no longer be described as destabilizing or accommodative of inflation.