Uncovering the Hit-List for Small Inflation Targeters: A Bayesian Structural Analysis

Timothy Kam, Kirdan Lees and Philip Liu

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We estimate underlying macroeconomic policy objectives of three of the earliest explicit inflation targeters - Australia, Canada and New Zealand - within the context of a small open economy DSGE model. We assume central banks set policy optimally, such that we can reverse engineer policy objectives from observed time series data. We find that none of the central banks show a concern for stabilizing the real exchange rate. All three central banks share a concern for minimizing the volatility in the change in the nominal interest rate. The Reserve Bank of Australia places the most weight on minimizing the deviation of output from trend. Joint tests of the posterior distributions of these policy preference parameters suggest that the central banks are very similar in their overall objective.

Keywords: small open economies; central bank objectives; Bayesian time series analysis (search for similar items in EconPapers)
JEL-codes: C51 E52 F41 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2006-11
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2006-24

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