This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Inflation Targeting and Exchange Rate Fluctuations in Australia

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Chris Ryan (Reserve Bank of Australia)
Christopher Thompson (Reserve Bank of Australia)
Abstract

Several recent papers have explored the possibility that inflation-targeting central banks in small open economies pay too much attention to exchange rate fluctuations; changing short-term interest rates in response to fluctuations that have transient effects on inflation could be counterproductive. Accordingly, we investigate whether the Reserve Bank of Australia, while ultimately concerned with aggregate inflation and output, should set short-term interest rates on the basis of expected inflation in the non-tradeable sector or go even further and react directly to expected wage pressures in that sector’s labour market. Our results indicate that there are no clear gains to be had from responding only to measures of inflation which abstract from temporary exchange rate fluctuations. The variability of inflation and output would be at least as great as under the current framework, while the shocks that have typically hit the Australian economy over the past couple of decades are such that interest rates would be no less variable than under the current inflation-targeting framework. We attribute these findings to the forward-looking nature of the current inflation-targeting framework, whereby exchange rate shocks are ignored in the setting of policy if they are expected to have only a temporary impact on inflation.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. 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.rba.gov.au/rdp/RDP2000-06.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2000-06.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: Sep 2000
Date of revision:
Handle: RePEc:rba:rbardp:rdp2000-06

Contact details of provider:
Postal: GPO Box 3947, Sydney NSW 2001
Phone: 61-2-9551-8111
Fax: 61-2-9551-8000
Email:
Web page: http://www.rba.gov.au/
More information through EDIRC

Order Information:
Web: http://www.rba.gov.au/PublicationsAndResearch/RDP/RDP_Order/index.html

For technical questions regarding this item, or to correct its listing, contact: (Paula Drew).

Related research
Keywords: exchange rates; inflation targeting; macroeconomic model; monetary policy rules; open economy;

Other versions of this item:

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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. Jamie Armour & Agathe Côté, 2000. "Feedback Rules for Inflation Control: An Overview of Recent Literature," Bank of Canada Review, Bank of Canada, vol. 2000(Winter), pages 43-54. [Downloadable!]
  2. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June. [Downloadable!] (restricted)
    Other versions:
  3. Frank Smets, 1997. "Financial asset prices and monetary policy: theory and evidence," BIS Working Papers 47, Bank for International Settlements. [Downloadable!]
    Other versions:
  4. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies. [Downloadable!]
    Other versions:
  5. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Nargis Bharucha & Christopher Kent, 1998. "Inflation Targeting in a Small Open Economy," RBA Research Discussion Papers rdp9807, Reserve Bank of Australia. [Downloadable!]
  7. Guy Debelle & Adam Cagliarini, 2000. "The Effect of Uncertainty on Monetary Policy: How Good are the Brakes?," RBA Research Discussion Papers rdp2000-07, Reserve Bank of Australia. [Downloadable!]
    Other versions:
  8. Meredith Beechey & Nargis Bharucha & Adam Cagliarini & David Gruen & Christopher Thompson, 2000. "A Small Model of the Australian Macroeconomy," RBA Research Discussion Papers rdp2000-05, Reserve Bank of Australia. [Downloadable!]
  9. David Gruen & Adrian Pagan & Christopher Thompson, 1999. "The Phillips Curve in Australia," RBA Research Discussion Papers rdp1999-01, Reserve Bank of Australia. [Downloadable!]
    Other versions:
  10. Adrian Blundell-Wignall & Jerome Fahrer & Alexandra Heath, 1993. "Major Influences on the Australian Dollar Exchange Rate," RBA Annual Conference Volume, in: Adrian Blundell-Wignall (ed.), The Exchange Rate, International Trade and the Balance of Payments Reserve Bank of Australia. [Downloadable!]
  11. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
    Other versions:
  12. Alison Tarditi, 1996. "Modelling the Australian Exchange Rate, Long Bond Yield and Inflationary Expectations," RBA Research Discussion Papers rdp9608, Reserve Bank of Australia. [Downloadable!]
  13. Gordon de Brouwer & James O'Regan, 1997. "Evaluating Simple Monetary-policy Rules for Australia," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia. [Downloadable!]
  14. Nicoletta Batini & Andrew G Haldane, . "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England. [Downloadable!]
    Other versions:
  15. Dwyer, Jacqueline, 1992. "The Tradeable Non-tradeable Dichotomy: A Practical Approach," Australian Economic Papers, Blackwell Publishing, vol. 31(59), pages 443-59, December.
  16. John Pitchford, 1993. "The Exchange Rate and Macroeconomic Policy in Australia," RBA Annual Conference Volume, in: Adrian Blundell-Wignall (ed.), The Exchange Rate, International Trade and the Balance of Payments Reserve Bank of Australia. [Downloadable!]
  17. Dwyer, Jacqueline & Kent, Christopher & Pease, Andrew, 1994. "Exchange Rate Pass-Through: Testing the Small Country Assumption for Australia," The Economic Record, The Economic Society of Australia, vol. 70(211), pages 408-23, December.
Full 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.)

  1. Isabel Ruiz, 2005. "Empirical analysis on the real effects of inflation and exchange rate uncertainty: The case of Colombia," International Finance 0511006, EconWPA. [Downloadable!]
  2. Marcela Meirelles Aurelio, 2005. "Do we really know how inflation targeters set interest rates?," Research Working Paper RWP 05-02, Federal Reserve Bank of Kansas City. [Downloadable!]
  3. G.C. Lim & Paul D. McNelis, 2001. "Central Bank Learning, Terms of Trade Shocks & Currency Risk: Should Exchange Rate Volatility Matter for Monetary Policy?," Boston College Working Papers in Economics 509, Boston College Department of Economics. [Downloadable!]
  4. Fernando Alexandre & John Drifill & Fabio Spagniolo, 2001. "Inflation Targeting and Exchange Rate Co-ordination," NIPE Working Papers 9/2001, NIPE - Universidade do Minho. [Downloadable!]
  5. G. C. LIM & PAUL D. McNELIS, 2002. "Central Bank Learning, Terms Of Trade Shocks & Currency Risks: Should Only Inflation Matter For Monetary Policy?," Department of Economics - Working Papers Series 831, The University of Melbourne. [Downloadable!]
    Other versions:
  6. Karunaratne, Neil Dias, 2006. "The New Economy and the Dollar Puzzle," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 36(1-2), pages 25-43, March/Sep. [Downloadable!]
  7. Jocelyn Horne, 2001. "Myths and Misconceptions of Exchange Rates," Research Papers 0105, Macquarie University, Department of Economics. [Downloadable!]
Statistics
Access and download statistics

Did you know? Over 80% of the top 1000 economists are registered on RePEc.

This page was last updated on 2009-12-2.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.