Cukierman and Meltzer (1986). In subsequent literature, the introduction of nominal
frictions permitted real effects of expected monetary policy. By contrast with earlier
emphasis on the strength of unanticipated policy under learning, more recent papers indicate
that expected policy effects can be significantly attenuated if private agents are not instantly
aware of shifts in policy targets, such as the lengthy learning lags estimated in Kozicki and
Tinsley (2001a, 2001b).
Accounting for imperfect policy credibility and learning is particularly important in the
context of the nonstationary behavior of postwar U.S. inflation. Regime-switching models
fit to U.S. inflation include, Brunner (1991), Evans and Wachtel (1993), Evans and Lewis
(1995), and Garcia and Perron (1996). Levin and Piger (2003) present evidence for a
one-time break in the mean inflation rates of twelve industrial countries, including the U.S.,
over a 1984-2002 sample. Relaxing the assumption of a fixed number of regimes and using
samples from the 1960s through the 1990s, Kozicki and Tinsley (2001a, 2001b, and 2002)
provide empirical evidence on nonstationary movements in the mean of inflation and suggest
these reflect shifts in private agent perceptions of the policy target for inflation.
Of course, evidence of mean shifts in the inflation process may be consistent with an
unknown, but fixed, inflation target and time-varying perceptions. For example, Orphanides
and Williams (2003) illustrate that the perceived inflation target estimated by learning
agents may increase in response to unfavorable inflation shocks, even if the true target is
invariant. The divergence of perceived and actual inflation targets is larger for policies
that place more emphasis on real output stability, providing one interpretation of high
and rising levels of inflation in the 1970s. An alternative historical interpretation includes
the prospect that the effective inflation target drifted higher in the 1970s, in part due to
partial accommodation of sizeable supply shocks, followed in the 1980s by rapid reductions
in the true policy target but much slower declines in the perceived inflation target. While
the latter view is more consistent with econometric specifications used in this paper, both