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Inflation Targeting and the Inflation Process: Some Lessons from an Open Economy

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Author Info

  • Guy Debelle

    (Reserve Bank of Australia)

  • Jenny Wilkinson

    (Reserve Bank of Australia)

Abstract

In an open economy inflation-targeting framework, whether policy-makers should target aggregate or non-traded inflation depends on the structural relationships in the economy. This paper shows that in a small empirical model of the Australian economy, it makes little difference which measure is targeted. This conclusion is reinforced by the significant changes to the inflation process that the paper suggests have occurred over the past two decades: the effect of exchange rate changes on inflation appears to have become more muted and the inflation process appears to have become better anchored.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2002-01.

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Date of creation: Jan 2002
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Handle: RePEc:rba:rbardp:rdp2002-01

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Related research

Keywords: exchange rates; inflation targeting; monetary policy;

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References

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  1. Laurence Ball, 2000. "Policy Rules and External Shocks," Working Papers Central Bank of Chile 82, Central Bank of Chile.
  2. David Gruen, 2000. "Introduction to The Australian Economy in the 1990s," RBA Annual Conference Volume, in: David Gruen & Sona Shrestha (ed.), The Australian Economy in the 1990s Reserve Bank of Australia.
  3. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
  4. Jacqueline Dwyer & Kenneth Leong, 2001. "Changes in the Determinants of Inflation in Australia," RBA Research Discussion Papers rdp2001-02, Reserve Bank of Australia.
  5. 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.
  6. Chris Ryan & Christopher Thompson, 2000. "Inflation Targeting and Exchange Rate Fluctuations in Australia," RBA Research Discussion Papers rdp2000-06, Reserve Bank of Australia.
  7. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
  8. Jacqueline Dwyer & Kenneth Leong, 2001. "Changes in the determinants of inflation in Australia," BIS Papers chapters, in: Bank for International Settlements (ed.), Empirical studies of structural changes and inflation, volume 3, pages 1-28 Bank for International Settlements.
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Citations

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Cited by:
  1. Efrem Castelnuovo, 2004. "Regime Shifts and the Stability of Backward Looking Phillips Curves in Open Economies," Computing in Economics and Finance 2004 49, Society for Computational Economics.
  2. Papa M'B. P. N'Diaye & Douglas Laxton, 2002. "Monetary Policy Credibility and the Unemployment-Inflation Tradeoff," IMF Working Papers 02/220, International Monetary Fund.
  3. Kara, Amit & Nelson, Edward, 2003. "The Exchange Rate and Inflation in the UK," CEPR Discussion Papers 3783, C.E.P.R. Discussion Papers.
  4. 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.
  5. Juthathip Jongwanich, 2006. "Exchange Rate Regimes, Capital Account Opening and Real Exchange Rates: Evidence from Thailand," Departmental Working Papers 2006-01, The Australian National University, Arndt-Corden Department of Economics.

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