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The role of the Reserve Bank's macro model in the formation of interest rate projections

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  • Tim Hampton

    (Reserve Bank of New Zealand)

Abstract

The Reserve Bank of New Zealand is relatively unique in that our macroeconomic projections include a variable nominal interest rate path over the projection period. This approach is different from the constant nominal interest rate assumption used by most other central banks. In New Zealand, the interest rate projection is produced using a combination of the Bank's core macroeconomic model and policy-maker judgement. The model increases projected short-term interest rates when inflation is projected to be persistently high relative to target, and lowers interest rates when inflation is projected to be persistently low relative to target. In this sense, model projections are referred to as endogenous interest rate projections. This article explains the rationale for endogenous interest rate projections and why the Reserve Bank has adopted this approach.

Suggested Citation

  • Tim Hampton, 2002. "The role of the Reserve Bank's macro model in the formation of interest rate projections," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, June.
    • Handle: RePEc:nzb:nzbbul:june2002:1
    as

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    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2002/2002jun65-2hampton.pdf
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    References listed on IDEAS

    as
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    2. Anonymous, 1997. "The Forecasting and Policy System: an introduction," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 60, September.
    3. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(s1), pages 1-35.
    4. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco.
    5. Chris Plantier & Dean Scrimgeour, 2002. "The Taylor Rule and its relevance to New Zealand monetary policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, March.
    6. Mike Frith & Aaron Drew, 1998. "Forecasting at the Reserve Bank of New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, December.
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    Cited by:

    1. Sharon McCaw & Satish Ranchhod, 2002. "The Reserve Bank's forecasting performance," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, December.
    2. Bruna, Karel & Tran, Quang Van, 2020. "The central banks’ ability to control variability of money market interest rates: The case of inflation targeting countries," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 384-402.
    3. Malte Knüppel & Guido Schultefrankenfeld, 2017. "Interest rate assumptions and predictive accuracy of central bank forecasts," Empirical Economics, Springer, vol. 53(1), pages 195-215, August.
    4. Bennett T. McCallum & Edward Nelson, 2005. "Targeting versus instrument rules for monetary policy," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 225-245.
    5. Michal Skořepa & Viktor Kotlán, 2006. "Inflation Targeting: To Forecast or To Simulate?," Prague Economic Papers, Prague University of Economics and Business, vol. 2006(4), pages 300-314.
    6. Tim Hampton & Dominick Stephens & Renee Philip, 2003. "Monetary policy communication and uncertainty," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 66, June.
    7. James Twaddle & David Hargreaves & Tim Hampton, 2006. "Other stabilisation objectives within an inflation targeting regime: Some stochastic simulation experiments," Reserve Bank of New Zealand Discussion Paper Series DP2006/04, Reserve Bank of New Zealand.

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