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Operating Objectives for Monetary Policy

Author

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  • Malcolm L. Edey

    (Reserve Bank of Australia)

Abstract

This paper investigates simple monetary policy rules using a theoretical model of a small open economy. The anlysis is intended to highlight two problems in policy formulation that are of particular importance to Australia: instability of the money demand function, and exposure of the economy to external shocks. Among the class of simple rules that are considered, it is shown that nominal income targeting consistently gives the lowest short-run variability of real output. In particular, such a policy outperforms both a monetary target and a fixed exchange rate. Problems of inaccurate information and recognition lags reduce the attractiveness of all targeting rules relative to the alternative of fixing the exchange rate. However, these problems do not provide grounds for a return to simple forms of monetary targeting.

Suggested Citation

  • Malcolm L. Edey, 1990. "Operating Objectives for Monetary Policy," RBA Research Discussion Papers rdp9007, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp9007
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    File URL: https://www.rba.gov.au/publications/rdp/1990/9007.html
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    Cited by:

    1. Malcolm Edey, 1997. "The Debate on Alternatives for Monetary Policy in Australia," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    2. Warwick McKibbin, 1997. "Which Monetary-policy Regime for Australia?," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    3. Malcolm Edey & John Romalis, 1996. "Issues in Modelling Monetary Policy," RBA Research Discussion Papers rdp9604, Reserve Bank of Australia.
    4. Alison Tarditi, 1996. "Modelling the Australian Exchange Rate, Long Bond Yield and Inflationary Expectations," RBA Research Discussion Papers rdp9608, Reserve Bank of Australia.
    5. Michael Artis, 1993. "The Role of the Exchange Rate in Monetary Policy - the Experience of Other Countries," RBA Annual Conference Volume (Discontinued), in: Adrian Blundell-Wignall (ed.),The Exchange Rate, International Trade and the Balance of Payments, Reserve Bank of Australia.

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