Discussion paper release

Thursday, 8 April 2004, 10:36 am
Press Release: Reserve Bank

Do inflation targeting central banks behave asymmetrically? Evidence from Australia and New Zealand

By Özer Karagedikli and Kirdan Lees, April 2004 This paper tests the standard quadratic approximation to central bank preferences on data from Australia and New Zealand, two of the earliest explicit inflation targeting countries. The standard linear-quadratic monetary policy model assumes central bank preferences over key macroeconomic variables, such as inflation and output, can be usefully approximated by a quadratic function.

This approximation implies that a deviation from a target is considered to be equally costly irrespective of whether the deviation is positive or negative. Combined with a linear model of the economy, quadratic preferences are useful because they yield a first order condition that implies a linear interest rate reaction function. This paper relaxes the assumption of quadratic preferences by allowing central banks to regard the costs associated with positive and negative output gaps differently. Our models To read the paper click on the link below http://www.rbnz.govt.nz/research/discusspapers/dp2004.html

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