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Uncovering The Hit-List For Small Inflation Targeters: A Bayesian Structural Analysis

  • Timothy Kam

    ()

  • Kirdan Lees
  • Philip Liu

We estimate the 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 stablizing the real exchange rate. All three central banks share a cocnern 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.

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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2006-24.

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Length: 30 pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:een:camaaa:2006-24
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  1. Ozlale, Umit, 2003. "Price stability vs. output stability: tales of federal reserve administrations," Journal of Economic Dynamics and Control, Elsevier, vol. 27(9), pages 1595-1610, July.
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  7. Richard Dennis, 2001. "The policy preferences of the U.S. Federal Reserve," Working Paper Series 2001-08, Federal Reserve Bank of San Francisco.
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  11. John C. Williams & Andrew T. Levin, 2003. "Robust Monetary Policy with Competing Reference Models," Computing in Economics and Finance 2003 291, Society for Computational Economics.
  12. Philip Lowe & Luci Ellis, 1997. "The Smoothing of Official Interest Rates," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
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