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Inflation Targeting and the Inflation Process: Some Lessons from an Open Economy

Author

Listed:
  • Guy Debelle

    (Reserve Bank of Australia)

  • Jenny Wilkinson

    (Reserve Bank of Australia)

Abstract

In an open economy inflation-targeting framework, whether policy-makers should target aggregate or non-traded inflation depends on the structural relationships in the economy. This paper shows that in a small empirical model of the Australian economy, it makes little difference which measure is targeted. This conclusion is reinforced by the significant changes to the inflation process that the paper suggests have occurred over the past two decades: the effect of exchange rate changes on inflation appears to have become more muted and the inflation process appears to have become better anchored.

Suggested Citation

  • Guy Debelle & Jenny Wilkinson, 2002. "Inflation Targeting and the Inflation Process: Some Lessons from an Open Economy," RBA Research Discussion Papers rdp2002-01, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2002-01
    as

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    References listed on IDEAS

    as
    1. Kuttner, Kenneth N. & Posen, Adam S., 1999. "Does talk matter after all? Inflation targeting and central bank behavior," CFS Working Paper Series 1999/04, Center for Financial Studies (CFS).
    2. Jacqueline Dwyer & Kenneth Leong, 2001. "Changes in the Determinants of Inflation in Australia," RBA Research Discussion Papers rdp2001-02, Reserve Bank of Australia.
    3. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
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    5. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    6. Jacqueline Dwyer & Kenneth Leong, 2001. "Changes in the determinants of inflation in Australia," BIS Papers chapters, in: Bank for International Settlements (ed.), Empirical studies of structural changes and inflation, volume 3, pages 1-28, Bank for International Settlements.
    7. 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.
    8. Palle S Andersen & William L Wascher, 2001. "Understanding the recent behaviour of inflation: an empirical study of wage and price developments in eight countries," BIS Papers chapters, in: Bank for International Settlements (ed.), Empirical studies of structural changes and inflation, volume 3, pages 267-302, Bank for International Settlements.
    9. Chris Ryan & Christopher Thompson, 2000. "Inflation Targeting and Exchange Rate Fluctuations in Australia," RBA Research Discussion Papers rdp2000-06, Reserve Bank of Australia.
    10. repec:bla:ecorec:v:70:y:1994:i:211:p:408-23 is not listed on IDEAS
    11. David Gruen, 2000. "Introduction to The Australian Economy in the 1990s," RBA Annual Conference Volume (Discontinued), in: David Gruen & Sona Shrestha (ed.),The Australian Economy in the 1990s, Reserve Bank of Australia.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Girijasankar Mallik & Anis Chowdhury, 2011. "Effect of inflation uncertainty, output uncertainty and oil price on inflation and growth in Australia," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 38(4), pages 414-429, September.
    2. 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.
    3. Castelnuovo, Efrem, 2008. "Regime shifts and the stability of backward-looking Phillips curves in open economies," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 40-53, February.
    4. Tony Cavoli & Ramkishen Rajan, 2003. "Designing Appropriate Exchange Rate Regimes for East Asia: Inflation Targeting and Monetary Policy Rules," Centre for International Economic Studies Working Papers 2003-09, University of Adelaide, Centre for International Economic Studies.
    5. Trinil Arimurti & Budi Trisnanto, 2011. "Persistensi Inflasi Di Jakarta dan Implikasinya Terhadap Kebijakan Pengendalian Inflasi Daerah," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 14(1), pages 5-30, July.
    6. Gernot Pehnelt, 2007. "Globalisation and Inflation in OECD Countries," Jena Economics Research Papers 2007-055, Friedrich-Schiller-University Jena.
    7. Marcela Meirelles Aurelio, 2005. "Do we really know how inflation targeters set interest rates?," Research Working Paper RWP 05-02, Federal Reserve Bank of Kansas City.
    8. Amit Kara & Edward Nelson, 2003. "The Exchange Rate and Inflation in the UK," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(5), pages 585-608, November.
    9. Diego Moccero & Shingo Watanabe & Boris Cournède, 2011. "What Drives Inflation in the Major OECD Economies?," OECD Economics Department Working Papers 854, OECD Publishing.
    10. GORDON De BROUWER & JAMES GILBERT, 2005. "Monetary Policy Reaction Functions in Australia," The Economic Record, The Economic Society of Australia, vol. 81(253), pages 124-134, June.
    11. Mr. Papa M N'Diaye & Mr. Douglas Laxton, 2002. "Monetary Policy Credibility and the Unemployment-Inflation Tradeoff: Some Evidence From 17 Industrial Countries," IMF Working Papers 2002/220, International Monetary Fund.
    12. Juthathip Jongwanich, 2006. "Exchange Rate Regimes, Capital Account Opening and Real Exchange Rates: Evidence from Thailand," Departmental Working Papers 2006-01, The Australian National University, Arndt-Corden Department of Economics.
    13. Harry Bloch & Michael Olive, 2007. "The Speed and Stability of Price Adjustment in Australian Manufacturing," The Economic Record, The Economic Society of Australia, vol. 83(s1), pages 46-56, September.

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    More about this item

    Keywords

    exchange rates; inflation targeting; monetary policy;
    All these keywords.

    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

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