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Asymmetric Monetary Policy in Australia

Shawn Leu () and Jeffrey Sheen ()

The Economic Record, 2006, vol. 82, issue s1, S85-S96

Abstract: We find evidence for asymmetric behaviour in Australian monetary policy. During 1984-1990, the Reserve Bank of Australia acted with considerable discretion yielding poor performance of an interest rate rule. However, it behaved asymmetrically to inflation and the output gap in downturns and upturns. On embracing inflation targeting from 1991, it enhanced its credibility by anchoring inflation expectations. Not only did its actions become more predictable in 1991-2002, it responded asymmetrically only to output, switching to act more acutely in downturns. Although its asymmetric behaviour could result from asymmetric preferences or non-linear aggregate supply, our results support the former explanation. Copyright © 2006 The Economic Society of Australia.

Date: 2006
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