Monetary Policy Rules in Practice: Evidence from New Zealand

Bank of Finland Working Paper No. 18/2001

38 Pages Posted: 28 Oct 2002

See all articles by Angela Huang

Angela Huang

Bank of Finland - Research

Dimitri Margaritis

Waikato Management School - Department of Economics; Auckland University of Technology - Faculty of Business & Law

David G. Mayes

University of Auckland Business School (Deceased)

Multiple version iconThere are 2 versions of this paper

Date Written: September 21, 2001

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

JEL Classification: E52, E58, E65

Suggested Citation

Huang, Angela and Margaritis, Dimitri and Margaritis, Dimitri and Mayes, David G., Monetary Policy Rules in Practice: Evidence from New Zealand (September 21, 2001). Bank of Finland Working Paper No. 18/2001, Available at SSRN: https://ssrn.com/abstract=315487 or http://dx.doi.org/10.2139/ssrn.315487

Angela Huang

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
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+358-9-1832560 (Fax)

Dimitri Margaritis

Waikato Management School - Department of Economics ( email )

Private Bag 3105
Hamilton
New Zealand
(64 7) 838 4454 (Phone)

HOME PAGE: http://dimitri@mngt.waikato.ac.nz/school/staff/staffhome.asp?ident=10803+++++&user=DIMITRI

Auckland University of Technology - Faculty of Business & Law ( email )

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Private Bag 92006
Auckland Central 1020, Auckland 1010
New Zealand

David G. Mayes (Contact Author)

University of Auckland Business School (Deceased)

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand