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Asymmetric Monetary Policy in Australia

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  • Leu, Shawn Chen-Yu
  • Sheen, Jeffrey

Abstract

We find evidence for asymmetric behaviour in Australian monetary policy. During 1984-1990, the Reserve Bank of Australia acted with considerable discretion yielding poor performance of an interest rate rule. However it behaved asymmetrically to inflation and the output gap in downturns and upturns. On embracing inflation targeting from 1991, it enhanced its credibility by anchoring inflation expectations. Not only did its actions become more predictable in 1991-2002, it responded asymmetrically only to output, switching to act more acutely in downturns. While its asymmetric behaviour could result from asymmetric preferences or non-linear aggregate supply, our results support the former explanation.

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Bibliographic Info

Paper provided by University of Sydney, School of Economics in its series Working Papers with number 2.

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Date of creation: Feb 2005
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Handle: RePEc:syd:wpaper:2123/7633

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Postal: Sydney, NSW 2006
Phone: 61 +2 9351 5055
Fax: 61 +2 9351 4341
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Web page: http://sydney.edu.au/arts/economics
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Keywords: non-linear Phillips curve; Interest rate rules; asymmetric preferences; generalized method of moments; inflation targeting; credibility;

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Cited by:
  1. Jaromír Baxa & Roman Horváth & Borek Vasícek, 2010. "How Does Monetary Policy Change? Evidence on Inflation Targeting Countries," Working Papers wpdea1007, Department of Applied Economics at Universitat Autonoma of Barcelona.
  2. Borek Vasicek, 2010. "Is Monetary Policy in New Members States Asymmetric?," William Davidson Institute Working Papers Series wp1005, William Davidson Institute at the University of Michigan.
  3. Leu, Shawn Chen-Yu & Sheen, Jeffrey, 2011. "A small New Keynesian state space model of the Australian economy," Economic Modelling, Elsevier, vol. 28(1), pages 672-684.
  4. Hoffmann, Andreas, 2009. "Fear of depression - Asymmetric monetary policy with respect to asset markets," MPRA Paper 17522, University Library of Munich, Germany.

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