Research Discussion Papers, Bank of Finland
No 18/2001:
Monetary policy rules in practice: Evidence from New Zealand
Angela Huang, Dimitri Margaritis and David Mayes ()
Abstract: We use the ten years of experience in inflation-targeting
in New Zealand since 1989 to test whether monetary policy appears to
conform to the simple rules that have been recommended for it in the
literature. Of the inflation targeting central banks, the Reserve Bank of
New Zealand has both the longest experience and probably the most clearly
defined target and policy framework for achieving it. We show that while a
Taylor rule with the standard parameters used in the US does indeed
describe New Zealand monetary policy quite well, the Reserve Bank has
focused rather more strongly on price stability, as required by its Policy
Target Agreements. However, while the conduct of New Zealand monetary
policy as set out in the Monetary Policy Statements is firmly based on
targeting the inflation rate in the future we find, using the Bank’s own
forecasts, that nevertheless targeting inflation close to the present
appears to be a better description of policy. Furthermore, restricting the
policy choice to the information available to the Reserve Bank at the
actual time of policy settings and ignoring subsequent revisions to
published statistics does not result in a much improved explanation of its
actions. We find a clear ‘smoothing’ element to the Bank’s policy rather
than immediate response to every small fluctuation. We show further that
some of the variables that enter the policy rule have slightly asymmetric
cycles. From symmetric and asymmetric cointegration tests on the long-run
relationship between interest rates, the output gap, and inflation we show
that there is insufficient evidence to suggest that monetary policy has
been asymmetric in treating upside inflationary pressures differently from
those towards deflation.
Keywords: monetary policy; Taylor rule; inflation targeting; New Zealand; (follow links to similar papers)
JEL-Codes: E52; E58; E65; (follow links to similar papers)
38 pages, September 21, 2001
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