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A happy "half way-house"? Medium term inflation targeting in New Zealand

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  • Lees, Kirdan
  • Warburton, Sam

Abstract

The 2002 Policy Targets Agreement (PTA) between the government and central bank of New Zealand asks the central bank to target inflation "over the medium term" rather than over an annual target. Delegating such a medium term objective to the central bank shifts inflation targeting towards a "halfway-house" between inflation targeting and price level targeting. We show empirically that this helps time consistent policy approximate the first-best commitment policy even when the government asks the central bank to weight output stabilisation differently to society. We estimate the New Zealand economy with a small open economy DSGE model and show that the happiest halfway house is located around a two year averaging horizon at most, which leads to mild improvements in monetary policy efficiency.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 5 (September)
Pages: 819-839

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:5:p:819-839

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Medium-term Inflation targeting Monetary policy DSGE;

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References

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Cited by:
  1. Dominick Stephens, 2006. "Should monetary policy attempt to reduce exchange rate volatility in New Zealand?," Reserve Bank of New Zealand Discussion Paper Series DP2006/05, Reserve Bank of New Zealand.

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