Inflation Targeting and Macroeconomic Distortions

Neil Dias Karunaratne ()
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Neil Dias Karunaratne: The University of Queensland, Department of Economics, Postal: Brisbane QLD 4072 Australia, http://www.uq.edu.au/economics/

Economia Internazionale / International Economics, 2001, vol. 54, issue 4, 523-556

Abstract: The paper examines the evolution of monetary policy design in Australia which has culminated in the adoption of inflation targeting using the institutional mechanism of central bank independence. A Vector Error Correction Model is specified linking inflation to measures of central bank independence and macroeconomic distortions in the labour market and the tax system. The empirical results indicate that a reduction of trade union power as captured by the neocorporatist index and the reform of the tax system would reduce real exchange volatility and sharpen Australia’s competitive edge. Furthermore, the empirics indicate that implementing a Taylor feedback rule to smooth out the cash rate would deliver superior outcomes on the pre-announced inflation target.

Keywords: Inflation targeting; Central Bank Independence; Macroeconomic distortions; Vector Error Correction Models; Policy reaction function. (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 F41 (search for similar items in EconPapers)
Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ecoint:0205

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