The Inflation Aversion of the Bundesbank: A State Space Approach

A simple backward-looking Taylor rule is estimated in a time-varying coefficient framework with quarterly German data for the period 1975-1998. Markov switching models and the Kalman Filter are used to extract the unobservable paths of the coefficients. The main finding is that the inflation aversion of the Bundesbank was not constant over time and exhibits some sudden and large shifts during the period of monetary targeting. There are phases with low and with high inflation aversion. This could for example explain why the estimated value of the inflation coefficient in backward-looking Taylor rules often does not exceed one and so violates the implications of theoretical monetary policy models. Moreover, the results provide evidence that the Bundesbank followed the so-called "opportunistic approach" to disinflation