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Uncovering The Hit-List For Small Inflation Targeters: A Bayesian Structural Analysis

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  • Timothy Kam

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  • Kirdan Lees
  • Philip Liu

Abstract

We estimate underlying macroeconomic policy objectives of three of the earliest explicit inflation targeters - Australia, Canada and New Zealand - within the context of a small open economy DSGE model. We assume central banks set policy optimally, such that we can reverse engineer policy objectives from observed time series data. We find that none of the central banks show a concern for stabilizing the real exchange rate. All three central banks share a concern for minimizing the volatility in the change in the nominal interest rate. The Reserve Bank of Australia places the most weight on minimizing the deviation of output from trend. Joint tests of the posterior distributions of these policy preference parameters suggest that the central banks are very similar in their overall objective.

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Bibliographic Info

Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2006-473.

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Length: 34 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:acb:cbeeco:2006-473

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  1. Kristoffer Nimark, 2006. "Optimal Monetary Policy with Real-time Signal Extraction from the Bond Market," RBA Research Discussion Papers rdp2006-05, Reserve Bank of Australia.
  2. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory 98-03, Federal Reserve Bank of San Francisco.
  3. Marco Del Negro & Frank Schorfheide, 2008. "Monetary policy analysis with potentially misspecified models," Staff Reports 321, Federal Reserve Bank of New York.
  4. Richard Dennis, 2001. "The policy preferences of the U.S. Federal Reserve," Working Paper Series 2001-08, Federal Reserve Bank of San Francisco.
  5. Efrem Castelnuovo & Paolo Surico, 2004. "Model Uncertainty, Optimal Monetary Policy and the Preferences of the Fed," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(1), pages 105-126, 02.
  6. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  7. Philip Lowe & Luci Ellis, 1997. "The Smoothing of Official Interest Rates," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
  8. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  9. Ozlale, Umit, 2003. "Price stability vs. output stability: tales of federal reserve administrations," Journal of Economic Dynamics and Control, Elsevier, vol. 27(9), pages 1595-1610, July.
  10. Lubik, Thomas A. & Schorfheide, Frank, 2007. "Do central banks respond to exchange rate movements? A structural investigation," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1069-1087, May.
  11. Andrew T. Levin & John C. Williams, 2003. "Robust monetary policy with competing reference models," Working Paper Series 2003-10, Federal Reserve Bank of San Francisco.
  12. Thomas Lubik & Frank Schorfheide, 2005. "A Bayesian Look at New Open Economy Macroeconomics," Economics Working Paper Archive 521, The Johns Hopkins University,Department of Economics.
  13. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September.
  14. DeJong, David N & Ingram, Beth Fisher & Whiteman, Charles H, 1996. "A Bayesian Approach to Calibration," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 1-9, January.
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Cited by:
  1. Andreza Aparecida Palma & Marcelo Savino Portugal, 2014. "Preferences Of The Central Bank Of Brazil Under The Inflation Targeting Regime: Estimation Using A Dsge Model For A Small Open Economy," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 055, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  2. Kristoffer Nimark, 2009. "A structural model of Australia as a small open economy," Economics Working Papers 1211, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Arief Ramayandi, 2008. "Simple Model for a Small Open Economy: An Application to the ASEAN-5 Countries," Working Papers in Economics and Development Studies (WoPEDS) 200801, Department of Economics, Padjadjaran University, revised May 2008.
  4. Sam Warburton & Kirdan Lees, 2005. "A happy "halfway-house"? Medium term inflation targeting in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2005/03, Reserve Bank of New Zealand.
  5. Julien Albertini & Güneş Kamber & Michael Kirker, 2012. "Estimated Small Open Economy Model With Frictional Unemployment," Pacific Economic Review, Wiley Blackwell, vol. 17(2), pages 326-353, 05.
  6. Selim Elekdag & Harun Alp, 2011. "The Role of Monetary Policy in Turkey During the Global Financial Crisis," IMF Working Papers 11/150, International Monetary Fund.
  7. Juan Paez-Farrell, 2012. "Taylor rules, fear of floating and the role of the exchange rate in monetary policy: a case of observational equivalence," Discussion Paper Series 2012_07, Department of Economics, Loughborough University, revised Jun 2012.
  8. Ross Kendall & Tim Ng, 2013. "Estimated Taylor Rules updated for the post-crisis period," Reserve Bank of New Zealand Analytical Notes series AN2013/04, Reserve Bank of New Zealand.

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