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How forward-looking is the Fed? Direct estimates from a `Calvo-type' rule

By Vasco Gabriel, Paul Levine and Christopher Spencer

Abstract

We estimate an alternative type of monetary policy rule, termed Calvo rule, according to which the central bank is assumed to target a discounted in?nite sum of future expected in?ation. Compared to conventional in?ation forecast-based rules, which are typically of the Taylor-type with discrete forward looking horizons, this class of rule is less prone to the problem of indeterminacy. Parameter estimates obtained from GMM estimation provide support for Calvo-type rules, suggesting that the Federal Reserve targeted a mean forward horizon of between 4 and 8 quarters.Calvo-type interest rules; In?ation Forecast Based rules; GMM; Indeterminacy.

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