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Uncovering the Hit-List for Small Inflation Targeters: A Bayesian Structural Analysis

Author

Listed:
  • Timothy Kam
  • Kirdan Lees
  • Philip Liu

Abstract

We estimate underlying macroeconomic policy objectives of three of the earliest explicit inflation targeters - Australia, Canada and New Zealand - within the context of a small open economy DSGE model. We assume central banks set policy optimally, such that we can reverse engineer policy objectives from observed time series data. We find that none of the central banks show a concern for stabilizing the real exchange rate. All three central banks share a concern for minimizing the volatility in the change in the nominal interest rate. The Reserve Bank of Australia places the most weight on minimizing the deviation of output from trend. Joint tests of the posterior distributions of these policy preference parameters suggest that the central banks are very similar in their overall objective.

Suggested Citation

  • Timothy Kam & Kirdan Lees & Philip Liu, 2006. "Uncovering the Hit-List for Small Inflation Targeters: A Bayesian Structural Analysis," CAMA Working Papers 2006-24, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2006-24
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    File URL: https://crawford.anu.edu.au/sites/default/files/2026-06/24_Kam_Lees_Liu_2006.pdf
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    Citations

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    Cited by:

    1. Kristoffer P. Nimark, 2009. "A Structural Model of Australia as a Small Open Economy," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 42(1), pages 24-41, March.
    2. Arief Ramayandi, 2008. "Simple Model for a Small Open Economy: An Application to the ASEAN-5 Countries," Working Papers in Economics and Development Studies (WoPEDS) 200801, Department of Economics, Padjadjaran University, revised May 2008.
    3. Lees, Kirdan & Warburton, Sam, 2010. "A happy "half way-house"? Medium term inflation targeting in New Zealand," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 819-839, September.
    4. Pelin Ilbas, 2008. "Estimation of monetary policy preferences in a forward-looking model : a Bayesian approach," Working Paper Research 129, National Bank of Belgium.
    5. Jacob Punnoose & Amber Wadsworth, 2018. "Estimated policy rules for different monetary regimes: Flexible inflation targeting versus a dual mandate," Reserve Bank of New Zealand Analytical Notes series AN2018/11, Reserve Bank of New Zealand.

    More about this item

    Keywords

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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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