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A happy "half way-house"? Medium term inflation targeting in New Zealand

  • Lees, Kirdan
  • Warburton, Sam

The 2002 Policy Targets Agreement (PTA) between the government and central bank of New Zealand asks the central bank to target inflation "over the medium term" rather than over an annual target. Delegating such a medium term objective to the central bank shifts inflation targeting towards a "halfway-house" between inflation targeting and price level targeting. We show empirically that this helps time consistent policy approximate the first-best commitment policy even when the government asks the central bank to weight output stabilisation differently to society. We estimate the New Zealand economy with a small open economy DSGE model and show that the happiest halfway house is located around a two year averaging horizon at most, which leads to mild improvements in monetary policy efficiency.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 5 (September)
Pages: 819-839

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:5:p:819-839
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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