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The Regional Appropriateness of Monetary Policy: An Application of Taylor’s Rule to Australian States and Territories

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  • Javier Hernandez
  • Allan Layton
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    Abstract

    In recent years Taylor’s rule has become a widely used tool for assessing the stance of monetary policy. Not only has it been used to evaluate the U.S. Federal Reserve’s monetary policy, but also, for example, to evaluate the appropriateness of the European Central Bank’s monetary policy for each individual member nation of the European Monetary Union. This paper builds on this work and uses Taylor’s rule to evaluate the degree of appropriateness of Australia’s national monetary policy to each of Australia’s states and territories. National monetary policy is represented by the overnight cash rate and this is compared to a notional cash rate calculated for each individual state and territory. The aim is to illustrate the extent to which national monetary policy historically may have deviated from what might have been most appropriate for the economic conditions of each state and territory. To this end, three different recent monetary policy episodes are analysed from a regional perspective. Moreover, an analysis of the disparities between the Australian states’ and territories’ notional cash rates with the actual national cash rate suggests – perhaps not too surprisingly - that the Reserve Bank of Australia implicitly sets national cash rates in close accordance with the economic conditions of Australia’s two most populous states.

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    File URL: http://external-apps.qut.edu.au/business/documents/discussionPapers/2002/DP%20No%20115.pdf
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    Bibliographic Info

    Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 115.

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    Date of creation: 20 Aug 2002
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    Handle: RePEc:qut:dpaper:115

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    Web page: http://www.bus.qut.edu.au/faculty/economics/
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    Keywords: Taylor’s rule; monetary policy; Reserve Bank of Australia; regional;

    References

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    1. 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.
    2. Taylor, John B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank," Seminar Papers 649, Stockholm University, Institute for International Economic Studies.
    3. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, vol. 67(2), pages 165-171, May.
    4. Guy Debelle, 1999. "Inflation Targeting and Output Stabilisation," RBA Research Discussion Papers rdp1999-08, Reserve Bank of Australia.
    5. Taylor, J.B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by European Central Bank," Papers 649, Stockholm - International Economic Studies.
    6. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, vol. 43(4-6), pages 801-812, April.
    7. Nils Björksten & Miika Syrjänen, 2000. "How Problematic are Internal Euro Area Differences?," EUI-RSCAS Working Papers 14, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    8. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
    9. Gert Schnabel & Stefan Gerlach, 1999. "The Taylor rule and interest rates in the EMU area: a note," BIS Working Papers 73, Bank for International Settlements.
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