New Zealand's experience with changing its inflation target and the impact on inflation expectations

Michelle Lewis and Christopher McDermott

New Zealand Economic Papers, 2016, vol. 50, issue 3, 343-361

Abstract: We document the experience of the Reserve Bank of New Zealand in changing its inflation target, particularly the effects on inflation expectations. First, the Reserve Bank of New Zealand's dynamic stochastic general equilibrium model is used to highlight expectation formation in the transmission following a change in the inflation target. Second, a Nelson–Siegel model is used to combine a number of inflation expectation surveys into a continuous curve where expectations can be plotted as a function of the forecast horizon. Using estimates of long-run inflation expectations derived from the Nelson–Siegel model, we find that numerical changes in the inflation target result in an immediate change in inflation expectations.

Date: 2016
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DOI: 10.1080/00779954.2016.1191529

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