A happy "halfway-house"? Medium term inflation targeting in New Zealand

Sam Warburton and Kirdan Lees

No DP2005/03, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: The 2002 Policy Targets Agreement (PTA) between the Reserve Bank of New Zealand and the government asks the Reserve Bank to target inflation "over the medium term" rather than over an annual target. This medium term objective shifts inflation targeting towards a "halfway-house" between inflation targeting and price level targeting. Extending the inflation averaging horizon to the medium term improves the inflation-output tradeoff by influencing inflation expectations. But how long should the medium term be? Characterizing the New Zealand economy with a small new-Keynesian model, we show that the happiest halfway house is located around a two or three year averaging horizon which leads to mild, but non-trivial, improvements in the efficiency of monetary policy.

JEL-codes: E52 E58 E61 (search for similar items in EconPapers)
Pages: 26 p.
Date: 2005-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Journal Article: A happy "half way-house"? Medium term inflation targeting in New Zealand (2010)
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