IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Do inflation targeting central banks behave asymmetrically? Evidence from Australia and New Zealand

This paper tests the standard quadratic approximation to central bank preferences on data from Australia and New Zealand, two of the earliest explicit inflation targeting countries. The standard linear-quadratic monetary policy model assumes central bank preferences over key macroeconomic variables, such as inflation and output, can be usefully approximated by a quadratic function. This approximation implies that a deviation from a target is considered to be equally costly irrespective of whether the deviation is positive or negative. Combined with a linear model of the economy, quadratic preferences are useful because they yield a first order condition that implies a linear interest rate reaction function. This paper relaxes the assumption of quadratic preferences by allowing central banks to regard the costs associated with positive and negative output gaps differently. Our models also test for the possibility that positive and negative deviations of inflation from target to be treated differently. During the inflation targeting period in both countries, evidence suggests that we cannot reject quadratic preferences over inflation deviations (from target). We cannot reject that New Zealand's preferences regarding deviations of output from trend are quadratic, but Australia's behaviour does not appear to be consistent with quadratic preferences. Instead, the preferences of the Reserve Bank of Australia appear to be more accurately modelled with an asymmetric loss such that the Reserve Bank of Australia views negative output gaps as more costly than positive output gaps.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/2004/dp04_02.pdf
Download Restriction: no

Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP 2004/02.

as
in new window

Length: 28p
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:nzb:nzbdps:2004/02
Contact details of provider: Postal: P.O. Box 2498, Wellington
Phone: 64 4 471-3767
Fax: 64 4 471-2270
Web page: http://www.rbnz.govt.nz
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Ruge-Murcia, F.J., 2001. "Inflation Targeting Under Asymmetric Preferences," Cahiers de recherche 2001-04, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
  3. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-29, October.
  4. Hansen, Lars Peter & Heaton, John & Yaron, Amir, 1996. "Finite-Sample Properties of Some Alternative GMM Estimators," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 262-80, July.
  5. Alex Cukierman & Anton Muscatelli, 2001. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers 2002_4, Business School - Economics, University of Glasgow, revised Mar 2002.
  6. repec:cup:etheor:v:9:y:1993:i:2:p:222-40 is not listed on IDEAS
  7. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  8. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  9. David Card & Dean Hyslop, 1995. "Does Inflation 'Grease the Wheels of the Labor Market'?," Working Papers 735, Princeton University, Department of Economics, Industrial Relations Section..
  10. Orphanides, Athanasios & Wieland, Volker, 1999. "Inflation zone targeting," Working Paper Series 0008, European Central Bank.
  11. CHADHA, Jagjit & SCHELLEKENS, Philip, . "Monetary policy loss functions: two cheers for the quadratic," Working Papers 1999002, University of Antwerp, Faculty of Applied Economics.
  12. Seamus Hogan, 1998. "What Does Downward Nominal-Wage Rigidity Imply for Monetary Policy?," Canadian Public Policy, University of Toronto Press, vol. 24(4), pages 513-525, December.
  13. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
  14. Aaron Drew & L Christopher Plantier, 2000. "Interest rate smoothing in New Zealand and other dollar bloc countries," Reserve Bank of New Zealand Discussion Paper Series DP2000/10, Reserve Bank of New Zealand.
  15. Cragg, John G. & Donald, Stephen G., 1993. "Testing Identifiability and Specification in Instrumental Variable Models," Econometric Theory, Cambridge University Press, vol. 9(02), pages 222-240, April.
  16. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  17. Cukierman, Alex & Gerlach, Stefan, 2003. "The Inflation Bias Revisited: Theory and Some International Evidence," CEPR Discussion Papers 3761, C.E.P.R. Discussion Papers.
  18. 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.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:nzb:nzbdps:2004/02. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reserve Bank of New Zealand Knowledge Centre)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.