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Modelling the Reserve Bank of Australia's Policy Decisions and the Case for a Negative Cash Rate

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  • Timothy Anderson
  • John Hawkins

Abstract

Taylor's eponymous ‘rule’ models how central banks set policy rates in response to inflation and output. We estimate a Taylor rule for the Reserve Bank of Australia (RBA), modifying it to make it more realistic, while retaining its simplicity. The model implies that if the Bank responds to recent forecasts as it has on average since 1995, the cash rate could have briefly gone negative in 2020. But the RBA is wary of negative cash rates. There are grounds for caution; the economic outlook is particularly uncertain and the economy's response to negative rates is uncharted territory.

Suggested Citation

  • Timothy Anderson & John Hawkins, 2021. "Modelling the Reserve Bank of Australia's Policy Decisions and the Case for a Negative Cash Rate," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 54(2), pages 179-189, June.
    • Handle: RePEc:bla:ausecr:v:54:y:2021:i:2:p:179-189
    DOI: 10.1111/1467-8462.12406
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    References listed on IDEAS

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    Cited by:

    1. Burdekin, Richard C.K. & Nguyen, Quynh, 2023. "Daily monetary policy reactions to the pandemic: The Australian case," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 24-32.

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