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Inter-forecast monetary policy implementation: fixed-instrument versus MCI-based strategies



Monetary policy authorities can adjust their instrument at any point in time to achieve their policy objective. In some countries, such as the United States and the United Kingdom, policymakers choose to usually make adjustments only after a formal medium-term inflation forecast. Other countries, like Canada and New Zealand, have used simple inter-forecast strategies to make further instrument adjustments given unexpected developments in the exchange rate. These alternative strategies may be usefully thought of as fixing or banding a measure of "monetary conditions" that is comprised of the exchange rate and a short-term interest rate that is closely linked to the policy instrument. Such measures have come to be referred to as Monetary Conditions Indices (MCI).

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  • Ben Hunt, 1999. "Inter-forecast monetary policy implementation: fixed-instrument versus MCI-based strategies," Reserve Bank of New Zealand Discussion Paper Series G99/1, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbdps:1999/01

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    References listed on IDEAS

    1. Duguay, Pierre, 1994. "Empirical evidence on the strength of the monetary transmission mechanism in Canada: An aggregate approach," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 39-61, February.
    2. Richard Dennis, 1997. "A measure of monetary conditions," Reserve Bank of New Zealand Discussion Paper Series G97/1, Reserve Bank of New Zealand.
    3. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    4. Paul Conway & Aaron Drew & Ben Hunt & Alasdair Scott, 1998. "Exchange rate effects and inflation targeting in a small open economy: a stochastic analysis using FPS," Reserve Bank of New Zealand Discussion Paper Series G99/4, Reserve Bank of New Zealand.
    5. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    6. Ben Hunt, 1995. "The effect of foreign demand shocks on the Canadian economy: An analysis using QPM," Bank of Canada Review, Bank of Canada, vol. 1995(Autumn), pages 23-32.
    7. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    8. Aaron Drew & Ben Hunt, 1998. "The Forecasting and Policy System: stochastic simulations of the core model," Reserve Bank of New Zealand Discussion Paper Series G98/6, Reserve Bank of New Zealand.
    9. Flint Brayton & Peter A. Tinsley, 1996. "A guide to FRB/US: a macroeconomic model of the United States," Finance and Economics Discussion Series 96-42, Board of Governors of the Federal Reserve System (U.S.).
    10. Buiter, Willem H, 1988. "Death, Birth, Productivity Growth and Debt Neutrality," Economic Journal, Royal Economic Society, vol. 98(391), pages 279-293, June.
    11. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
    12. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
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    Cited by:

    1. Hunt, Benjamin & Rose, David & Scott, Alasdair, 2000. "The core model of the Reserve Bank of New Zealand's Forecasting and Policy System," Economic Modelling, Elsevier, vol. 17(2), pages 247-274, April.
    2. Orlowski, Lucjan T. & Rybinski, Krzysztof, 2006. "Implications of ERM2 for Poland's monetary policy," Economic Systems, Elsevier, vol. 30(4), pages 346-365, December.

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