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

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Abstract

The 2002 Policy Targets Agreement (PTA) between the Reserve Bank of New Zealand and the government asks the Reserve Bank to target inflation "over the medium term" rather than over an annual target. This medium term objective shifts inflation targeting towards a "halfway-house" between inflation targeting and price level targeting. Extending the inflation averaging horizon to the medium term improves the inflation-output tradeoff by influencing inflation expectations. But how long should the medium term be? Characterizing the New Zealand economy with a small new-Keynesian model, we show that the happiest halfway house is located around a two or three year averaging horizon which leads to mild, but non-trivial, improvements in the efficiency of monetary policy.

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  • Sam Warburton & Kirdan Lees, 2005. "A happy "halfway-house"? Medium term inflation targeting in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2005/03, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbdps:2005/03
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    Cited by:

    1. Dominick Stephens, 2006. "Should monetary policy attempt to reduce exchange rate volatility in New Zealand?," Reserve Bank of New Zealand Discussion Paper Series DP2006/05, Reserve Bank of New Zealand.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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