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Lessons from Inflation Targeting in New Zealand

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  • Aaron Drew

Abstract

This paper uses the Reserve Bank of New Zealand’s model to combine a macroeconomic evaluation of the performance inflation targeting with an analysis of policy rules. The questions to answer are two: (i) what lessons can be obtained from the shocks that have been experienced and the response given to them?, and, (ii) which is the optimal response to different types of shock?. The model allows to treat some issues of interest for the implementation of this scheme, like the flexibility of the inflation target (which depends on the degree of credibility of the monetary authority), the optimal policy horizon (a intermediate horizon seems to achieve the best combination of inflation volatility and output) and the bandwidth (which implies a trade off between output volatility and inflation).

Suggested Citation

  • Aaron Drew, 2001. "Lessons from Inflation Targeting in New Zealand," Working Papers Central Bank of Chile 113, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:113
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_113.pdf
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    References listed on IDEAS

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    1. Laurence Ball, 2002. "Policy Rules and External Shocks," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 3, pages 047-064, Central Bank of Chile.
    2. Donald Coletti & Benjamin Hunt & David Rose & Robert Tetlow, 1996. "The Bank of Canada's New Quarterly Projection Model. Part 3 , the Dynamic Model : QPM," Technical Reports 75, Bank of Canada.
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    5. Sean Collins & Francisco Nadal De Simone & David Hargreaves, 1998. "The current account balance: an analysis of the issues," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, March.
    6. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, vol. 3(Aug), pages 9-110.
    7. Norman Loayza & Klaus Schmidt-Hebbel, 2002. "Monetary Policy Functions and Transmission Mechanisms: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 1, pages 001-020, Central Bank of Chile.
    8. Guy Debelle & Mr. Miguel A Savastano & Mr. Paul R Masson & Mr. Sunil Sharma, 1998. "Inflation Targeting as a Framework for Monetary Policy," IMF Economic Issues 1998/005, International Monetary Fund.
    9. Aaron Drew & Adrian Orr, 1999. "The Reserve Bank's role in the recent business cycle: actions and evolutions," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, March.
    10. Lewis Evans & Arthur Grimes & Bryce Wilkinson, 1996. "Economic Reform in New Zealand 1984-95: The Pursuit of Efficiency," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1856-1902, December.
    11. Aaron Drew & Ben Hunt, 1998. "The Forecasting and Policy System: preparing economic projections," Reserve Bank of New Zealand Discussion Paper Series G98/7, Reserve Bank of New Zealand.
    12. Guy Debelle & Miguel A Savastano & Paul R Masson & Sunil Sharma, 1998. "Inflation Targeting as a Framework for Monetary Policy," IMF Economic Issues 15, International Monetary Fund.
    13. William A Allen, 1999. "Inflation Targeting: The British Experience," Lectures, Centre for Central Banking Studies, Bank of England, number 1, April.
    14. Lars E O Svensson, 1997. "Inflation targeting in an open economy: strict or flexible inflation targeting?," Reserve Bank of New Zealand Discussion Paper Series G97/8, Reserve Bank of New Zealand.
    15. Gordon G. Thiessen, 1998. "The Canadian Experience with Targets for Inflation Control," Canadian Public Policy, University of Toronto Press, vol. 24(4), pages 415-428, December.
    16. Anne-Marie Brook & Sean Collins & Christie Smith, 1998. "The 1991-97 business cycle in review," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, December.
    17. International Monetary Fund, 1998. "Inflation Targeting As a Framework for Monetary Policy," IMF Economic Issues 1998/006, International Monetary Fund.
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    Cited by:

    1. Francisco Rosende, 2008. "La Conquista de la Inflación: Revisión y Análisis de la Literatura Reciente," Documentos de Trabajo 330, Instituto de Economia. Pontificia Universidad Católica de Chile..
    2. Andrzej Toroj, 2008. "Estimation of weights for the Monetary Conditions Index in Poland," Working Papers 27, Department of Applied Econometrics, Warsaw School of Economics.
    3. Ferro, Gustavo, 2007. "Metas de inflación ¿qué hay de nuevo bajo el sol? [Inflation Targeting. What's new under the sun?]," MPRA Paper 15069, University Library of Munich, Germany, revised 11 Mar 2008.
    4. Ralf Fendel, 2004. "Perspektiven und Grenzen der Verwendung geldpolitischer Regeln," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 5(2), pages 169-192, May.
    5. Torój, Andrzej, 2010. "Adjustment capacity in a monetary union: a DSGE evaluation of Poland and Slovakia," MF Working Papers 4, Ministry of Finance in Poland, revised 11 May 2010.
    6. Andrzej Toroj, 2011. "Competitiveness channel in Poland and Slovakia: a pre-EMU DSGE analysis," NBP Working Papers 86, Narodowy Bank Polski.

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