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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)

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    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.

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    File URL: http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2002/2002jun65_2hampton.pdf
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    Bibliographic Info

    Article provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.

    Volume (Year): 65 (2002)
    Issue (Month): (June)
    Pages:

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    Handle: RePEc:nzb:nzbbul:june2002:1

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    1. Woodford, M., 1999. "Optimal Monetary Policy Inertia.," Papers 666, Stockholm - International Economic Studies.
    2. Lars E.O. Svensson, 2002. "Inflation Targeting: Should It Be Modeled as an Instrument Rule or a Targeting Rule?," NBER Working Papers 8925, National Bureau of Economic Research, Inc.
    3. Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
    4. Anonymous, 1997. "The Forecasting and Policy System: an introduction," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 60, September.
    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. Michal Skořepa & Viktor Kotlán, 2006. "Inflation Targeting: To Forecast or To Simulate?," Prague Economic Papers, University of Economics, Prague, vol. 2006(4), pages 300-314.
    2. Knüppel, Malte & Schultefrankenfeld, Guido, 2013. "The Empirical (Ir)Relevance of the Interest Rate Assumption for Central Bank Forecasts," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80042, Verein für Socialpolitik / German Economic Association.
    3. Bennett T. McCallum & Edward Nelson, 2004. "Targeting vs. instrument rules for monetary policy," Working Papers 2004-011, Federal Reserve Bank of St. Louis.
    4. 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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