Do the Central Banks of Australia and New Zealand Behave Asymmetrically? Evidence from Monetary Policy Reaction Functions

12 Pages Posted: 10 Jun 2007

See all articles by Özer Karagedikli

Özer Karagedikli

Reserve Bank of New Zealand

Kirdan R. Lees

Government of New Zealand - Department of Economics

Abstract

We test for evidence of asymmetric behaviour in the monetary policy reaction functions of the central banks of Australia and New Zealand. For the Reserve Bank of New Zealand, we found little evidence of asymmetric behaviour, whereas the Reserve Bank of Australia (RBA) appears to react more aggressively to negative output relative to positive output gaps of the same size. We impose additional structure on our model to help distinguish whether the asymmetric response originates from non-linearity in the inflation equation or from non-linearity in an approximate representation of the RBA's preferences over macroeconomic outcomes. We find that the preferences of the RBA may drive the asymmetry: the RBA appears to dislike negative output gaps more than positive output gaps of the same magnitude. We show this generates only a small increase in the conditional mean of inflation that is statistically indistinguishable from the target rate of inflation.

Suggested Citation

Karagedikli, Ozer and Lees, Kirdan R., Do the Central Banks of Australia and New Zealand Behave Asymmetrically? Evidence from Monetary Policy Reaction Functions. Economic Record, Vol. 83, No. 261, pp. 131-142, June 2007. Available at SSRN: https://ssrn.com/abstract=991986 or http://dx.doi.org/10.1111/j.1475-4932.2007.00389.x

Ozer Karagedikli

Reserve Bank of New Zealand ( email )

2 The Terrace
P.O. Box 2498
Wellington, 6011
New Zealand
64 4-471-3792 (Phone)
64 4-473-1209 (Fax)

Kirdan R. Lees (Contact Author)

Government of New Zealand - Department of Economics ( email )

2 The Terrace
P.O. Box 2498
Wellington
New Zealand

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