What Do the RBA's Forecasts Imply About its Preferences Over Inflation and Output Volatility?

16 Pages Posted: 13 Nov 2011

See all articles by Glenn Otto

Glenn Otto

UNSW Australia Business School, School of Economics

Graham M. Voss

University of Victoria - Department of Economics

Date Written: December 2011

Abstract

The Reserve Bank of Australia (RBA) has recently commenced publishing its forecasts of inflation and output growth in their quarterly Statement on Monetary Policy. As the RBA can potentially influence future outcomes for inflation and output through its choice of cash rate target, we examine whether the RBA’s forecasts reveal useful information about its tradeoff between inflation and output volatility. Our results suggest that the RBA targets a linear combination of deviations of inflation around target and output growth around potential growth – where the weight given to output growth deviations is about one‐third that given to inflation deviations. If we interpret this weight as the ratio of a central bank’s (relative) preference for output volatility and the slope parameter of the Phillips Curve; for typical values of the latter parameter we find the RBA – while not a strict inflation targeter – gives significantly less weight to minimising deviations in the output gap, than it does to minimising deviations of inflation around target.

JEL Classification: E31, E51, E58

Suggested Citation

Otto, Glenn and Voss, Graham M., What Do the RBA's Forecasts Imply About its Preferences Over Inflation and Output Volatility? (December 2011). Economic Record, Vol. 87, Issue 279, pp. 509-524, 2011. Available at SSRN: https://ssrn.com/abstract=1958470 or http://dx.doi.org/10.1111/j.1475-4932.2011.00763.x

Glenn Otto (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Graham M. Voss

University of Victoria - Department of Economics ( email )

Victoria V8W Y2Y, BC
Canada

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