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Does the Reserve Bank of Australia follow a forward-looking nonlinear monetary policy rule?

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  • George B. Tawadros

Abstract

The conventional monetary policy rule describes a simple linear relationship between the domestic interest rate, inflation rate and output gap. An important extension to this rule is to incorporate the forward-looking behaviour of central banks, where it is assumed that they target an expected level of inflation instead of its current realised value. Using quarterly observations for the period 1993:1-2018:2, this paper investigates whether the conduct of monetary policy in Australia can be described by a forward-looking linear monetary policy rule, or by a nonlinear forward-looking monetary policy rule. In particular, the nonlinear forward-looking monetary policy rule is analysed in a regime-switching framework using a smooth logistic transition regression model. While the results show that the conventional forward-looking linear monetary policy rule describes the application of monetary policy in Australia reasonably well, the interest rate setting behaviour of the RBA is best described by a nonlinear forward-looking monetary policy rule.

Suggested Citation

  • George B. Tawadros, 2020. "Does the Reserve Bank of Australia follow a forward-looking nonlinear monetary policy rule?," Applied Economics, Taylor & Francis Journals, vol. 52(12), pages 1395-1408, March.
    • Handle: RePEc:taf:applec:v:52:y:2020:i:12:p:1395-1408
    DOI: 10.1080/00036846.2019.1673302
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    Cited by:

    1. Basse, Tobias & Wegener, Christoph, 2022. "Inflation expectations: Australian consumer survey data versus the bond market," Journal of Economic Behavior & Organization, Elsevier, vol. 203(C), pages 416-430.

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