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Exchange rate effects and inflation targeting in a small open economy: a stochastic analysis using FPS Author info | Abstract | Publisher info | Download info | Related research | Statistics Paul Conway
Aaron Drew
Ben Hunt
Alasdair Scott (Reserve Bank of New Zealand )
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registered author(s):
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.
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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number
G99/4.
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Length: 20p
Date of creation: May 1998Date of revision:
Handle: RePEc:nzb:nzbdps:1999/04Contact 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
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Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
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.:
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Svensson, L-E-O, 1996.
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references Cited by : (explanations , 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.)
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"Inter-forecast monetary policy implementation: responding to unexpected exchange rate movements ,"
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Aaron Drew & Ben Hunt, 1998.
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Aaron Drew & Ben Hunt, 1998.
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G98/6, Reserve Bank of New Zealand.
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David Hargreaves, 1999.
"SDS-FPS: a small demand-side version of the Forecasting and Policy System core model ,"
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Chris Plantier & Dean Scrimgeour, 2002.
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Reserve Bank of New Zealand Bulletin ,
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Peter Mikek, 2004.
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Applied Economics ,
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L Christopher Plantier & Dean Scrimgeour, 2002.
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Reserve Bank of New Zealand Discussion Paper Series
DP2002/06, Reserve Bank of New Zealand.
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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.
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James Twaddle & David Hargreaves & Tim Hampton, 2006.
"Other stabilisation objectives within an inflation targeting regime: Some stochastic simulation experiments ,"
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Ben Hunt, 1999.
"Inter-forecast monetary policy implementation: fixed-instrument versus MCI-based strategies ,"
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