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Inflation Targeting and Macroeconomic Distortions

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Abstract

The paper examines the evolution of monetary policy design in Australia which has culminated in the adoption of inflation targeting using the institutional mechanism of central bank independence. A Vector Error Correction Model is specified linking inflation to measures of central bank independence and macroeconomic distortions in the labour market and the tax system. The empirical results indicate that a reduction of trade union power as captured by the neocorporatist index and the reform of the tax system would reduce real exchange volatility and sharpen Australia’s competitive edge. Furthermore, the empirics indicate that implementing a Taylor feedback rule to smooth out the cash rate would deliver superior outcomes on the pre-announced inflation target.

Suggested Citation

  • Karunaratne, Neil Dias, 2001. "Inflation Targeting and Macroeconomic Distortions," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 54(4), pages 523-556.
    • Handle: RePEc:ris:ecoint:0205
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    Cited by:

    1. Sergi Bruno S. & Hsing Yu, 2010. "Responses of Monetary Policy to Inflation, the Output Gap, and Real Exchange Rates: The Case of Australia, Canada, and New Zealand," Global Economy Journal, De Gruyter, vol. 10(2), pages 1-11, May.

    More about this item

    Keywords

    Inflation targeting; Central Bank Independence; Macroeconomic distortions; Vector Error Correction Models; Policy reaction function.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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