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

Timothy Kam, Kirdan Lees and Philip Liu

Journal of Money, Credit and Banking, 2009, vol. 41, issue 4, 583-618

Abstract: We estimate underlying structural macroeconomic policy objectives of three of the earliest explicit inflation targeters within the context of a small open economy dynamic stochastic general equilibrium model. We assume central banks set policy optimally, such that we can reverse engineer policy objectives from observed time series data. Joint tests of the posterior distributions of these policy preference parameters suggest that the central banks are very similar in their overall objective. 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. We also show that the resulting optimal policy rule responds to exchange rate movements, even in the case where the central banks do not explicitly care about exchange rate stabilization. This result is also corroborated by results from an alternative simple‐rule characterization and estimation of central bank behavior. These last two findings point to the pitfalls of making inferences, from the level of ad hoc simple rules, about what central banks may care about.

Date: 2009
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Citations: View citations in EconPapers (9)

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https://doi.org/10.1111/j.1538-4616.2009.00224.x

Related works:
Journal Article: Uncovering the Hit List for Small Inflation Targeters: A Bayesian Structural Analysis (2009)
Working Paper: UNCOVERING THE HIT-LIST FOR SMALL INFLATION TARGETERS: A BAYESIAN STRUCTURAL ANALYSIS (2006)
Working Paper: Uncovering the Hit-list for Small Inflation Targeters: A Bayesian Structural Analysis (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:41:y:2009:i:4:p:583-618

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