Advanced Search
MyIDEAS: Login

Exchange rate effects and inflation targeting in a small open economy: a stochastic analysis using FPS

Contents:

Author Info

Abstract

In this paper, stochastic simulations of the Reserve Bank of New Zealand's new macroeconomic model, FPS, are used to examine the issue of which price index monetary policy should stabilise in a small open economy. Under the class of policy rules considered, targeting a measure of domestic inflation, which does not include the direct effects of exchange rate movements on the price of imported goods, results in lower variability in real output, nominal interest rates, the exchange rate and domestic price inflation. The result is robust if direct exchange rate effects influence agents' expectations of generalised inflation and if the policy maker is uncertain about how direct exchange rate effects influence expectations. Tracing out efficient policy frontiers under the two alternative targets illustrates that for a given level of CPI variability, output variability can be significantly reduced by targeting domestic price inflation.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/1999/g99_4.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number G99/4.

as in new window
Length: 20p
Date of creation: May 1998
Date of revision:
Handle: RePEc:nzb:nzbdps:1999/04

Contact details of provider:
Postal: P.O. Box 2498, Wellington
Phone: 64 4 471-3767
Fax: 64 4 471-2270
Email:
Web page: http://www.rbnz.govt.nz
More information through EDIRC

Related research

Keywords:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
  2. Lars E. O. Svensson, 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
  3. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  4. Bennett T. McCallum, 1991. "Targets, Indicators, and Instruments of Monetary Policy," NBER Working Papers 3047, National Bureau of Economic Research, Inc.
  5. Aaron Drew & Ben Hunt, 1998. "The Forecasting and Policy System: stochastic simulations of the core model," Reserve Bank of New Zealand Discussion Paper Series G98/6, Reserve Bank of New Zealand.
  6. P.A. Tinsley, 1993. "Fitting both data and theories: polynomial adjustment costs and error- correction decision rules," Finance and Economics Discussion Series 93-21, Board of Governors of the Federal Reserve System (U.S.).
  7. Buiter, Willem H, 1988. "Death, Birth, Productivity Growth and Debt Neutrality," Economic Journal, Royal Economic Society, vol. 98(391), pages 279-93, June.
  8. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
  9. Paul Conway & Ben Hunt, 1997. "Estimating potential output: a semi-structural approach," Reserve Bank of New Zealand Discussion Paper Series G97/9, Reserve Bank of New Zealand.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Paul Conway, 2000. "Monetary policy in an uncertain world," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 63, September.
  2. Yuong Ha, 2000. "Uncertainty about the length of the monetary policy transmission lag: implications for monetary policy," Reserve Bank of New Zealand Discussion Paper Series DP2000/01, Reserve Bank of New Zealand.
  3. David Hargreaves, 1999. "SDS-FPS: a small demand-side version of the Forecasting and Policy System core model," Reserve Bank of New Zealand Discussion Paper Series G99/10, Reserve Bank of New Zealand.
  4. Adrian Orr & Alasdair Scott & Bruce White, 1998. "The exchange rate and inflation targeting," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, September.
  5. 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.
  6. Hunt, Benjamin & Rose, David & Scott, Alasdair, 2000. "The core model of the Reserve Bank of New Zealand's Forecasting and Policy System," Economic Modelling, Elsevier, vol. 17(2), pages 247-274, April.
  7. Aaron Drew & Ben Hunt, 1998. "The Forecasting and Policy System: stochastic simulations of the core model," Reserve Bank of New Zealand Discussion Paper Series G98/6, Reserve Bank of New Zealand.
  8. P N Snowden & M A Salisu & N Taher, 2000. "Oiling the wheels: credit and monetary neutrality in Saudi Arabia," Working Papers 539748, Lancaster University Management School, Economics Department.
  9. Chris Ryan & Christopher Thompson, 2000. "Inflation Targeting and Exchange Rate Fluctuations in Australia," RBA Research Discussion Papers rdp2000-06, Reserve Bank of Australia.
  10. Ana Maria Santacreu, 2005. "Reaction functions in a small open economy: What role for non-traded inflation?," Reserve Bank of New Zealand Discussion Paper Series DP2005/04, Reserve Bank of New Zealand.
  11. Ben Hunt & Adrian Orr, 1999. "Inter-forecast monetary policy implementation: responding to unexpected exchange rate movements," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, March.
  12. Jihene Bousrih, 2012. "Degree of openness and inflation targeting policy: model of a small open economy," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(3), pages 232-246, August.
  13. L Christopher Plantier & Dean Scrimgeour, 2002. "Estimating a Taylor Rule for New Zealand with a time-varying neutral real rate," Reserve Bank of New Zealand Discussion Paper Series DP2002/06, Reserve Bank of New Zealand.
  14. Ajimuda Olumide, 2009. "Price Volatility, Expectations and Monetary Policy in Nigeria," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 109-140, May.
  15. Aaron Drew & L Christopher Plantier, 2000. "Interest rate smoothing in New Zealand and other dollar bloc countries," Reserve Bank of New Zealand Discussion Paper Series DP2000/10, Reserve Bank of New Zealand.
  16. 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.
  17. Peter Mikek, 2004. "Inflation targeting and switch of fiscal regime in New Zealand," Applied Economics, Taylor & Francis Journals, vol. 36(2), pages 165-172.
  18. Aaron Drew & Ben Hunt, 1998. "The Forecasting and Policy System: preparing economic projections," Reserve Bank of New Zealand Discussion Paper Series G98/7, Reserve Bank of New Zealand.
  19. F. Smets & R. Wouters, 1999. "The Exchange Rate and the Monetary Transmission Mechanism in Germany," DNB Staff Reports (discontinued) 35, Netherlands Central Bank.
  20. Ben Hunt, 1999. "Inter-forecast monetary policy implementation: fixed-instrument versus MCI-based strategies," Reserve Bank of New Zealand Discussion Paper Series G99/1, Reserve Bank of New Zealand.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nzb:nzbdps:1999/04. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reserve Bank of New Zealand Knowledge Centre).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.