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Interest rate smoothing in New Zealand and other dollar bloc countries

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Author Info
Aaron Drew
L Christopher Plantier (Reserve Bank of New Zealand)

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Abstract

This paper utilises the partial adjustment approach of Judd and Rudebusch (1998) to empirically estimate the degree of short-term interest rate smoothing by central banks in the dollar block countries. All countries appear to smooth short-term interest rates significantly, with New Zealand and Canada smoothing rates by less than what appears to be the case for Australia and the United States. We then examine the macroeconomic implications of interest rate smoothing using the Reserve Bank of New Zealand's macro model. The model is constructed such that the more interest rates are smoothed in the short-term, the larger inflation and output variability will be over the cycle. However, at least over the narrow range of the empirically based smoothing approaches, the results suggest that there may be little cost in smoothing short-term interest rates in New Zealand to the degree seen in Australia or the United States.

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File URL: http://www.rbnz.govt.nz/research/discusspapers/dp00_10.pdf
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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 DP2000/10.

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Length: 30p
Date of creation: Dec 2000
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Handle: RePEc:nzb:nzbdps:2000/10

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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.:
  1. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings, Federal Reserve Bank of Kansas City, pages 277-316. [Downloadable!]
  2. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Working Papers 6570, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Brian Sack, 1998. "Does the Fed act gradually? a VAR analysis," Finance and Economics Discussion Series 1998-17, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April. [Downloadable!] (restricted)
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  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. [Downloadable!]
  6. Brian Sack, 1998. "Uncertainty, learning, and gradual monetary policy," Finance and Economics Discussion Series 1998-34, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
  8. Brian Sack & Volker Wieland, 1999. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Finance and Economics Discussion Series 1999-39, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  9. Kelly R Eckhold, 1998. "Determinants of New Zealand bond yields," Reserve Bank of New Zealand Discussion Paper Series G98/1, Reserve Bank of New Zealand. [Downloadable!]
  10. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Paul Conway & Aaron Drew & Ben Hunt & Alasdair Scott, 1998. "Exchange rate effects and inflation targeting in a small open economy: a stochastic analysis using FPS," Reserve Bank of New Zealand Discussion Paper Series G99/4, Reserve Bank of New Zealand. [Downloadable!]
  12. Aaron Drew & Benjamin Hunt, 1999. "Efficient simple policy rules and the implications of potential output uncertainty," Reserve Bank of New Zealand Discussion Paper Series G99/5, Reserve Bank of New Zealand. [Downloadable!]
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  13. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January. [Downloadable!] (restricted)
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  14. Guthrie, Graeme & Wright, Julian, 2004. "The Optimal Design of Interest Rate Target Changes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 115-37, February.
  15. John C. Williams, 1999. "Simple rules for monetary policy," Finance and Economics Discussion Series 1999-12, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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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.)

  1. Kenneth D. West, 2004. "Monetary Policy and the Volatility of Real Exchange Rates in New Zealand," NBER Working Papers 10280, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Özer Karagedikli & Kirdan Lees, 2004. "Do inflation targeting central banks behave asymmetrically? Evidence from Australia and New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP 2004/02, Reserve Bank of New Zealand. [Downloadable!]
  3. Aaron Drew & Viv Hall & John McDermott & Robert St. Clair, 2001. "Would adopting the Australian dollar provide superior monetary policy in New Zealand?," Reserve Bank of New Zealand Discussion Paper Series DP2001/03, Reserve Bank of New Zealand. [Downloadable!]
    Other versions:
  4. W A Razzak, 2001. "Money in the era of inflation targeting," Reserve Bank of New Zealand Discussion Paper Series DP2001/02, Reserve Bank of New Zealand. [Downloadable!]
  5. Özer Karagedikli & Rishab Sethi & Christie Smith & Aaron Drew, 2008. "Changes in the transmission mechanism of monetary policy in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/03, Reserve Bank of New Zealand. [Downloadable!]
  6. 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. [Downloadable!]
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