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Reserve Bank Of New Zealand Discussion Papers

THE LATEST RESERVE BANK OF NEW ZEALAND DISCUSSION PAPERS

December 21, 2005

The following Discussion Papers have been released on the Reserve Bank's website. The discussion papers are available at http://www.rbnz.govt.nz/research/discusspapers/

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DP2005/06. A Simple, Structural, and Empirical Model of the Antipodean Transmission Mechanism Thomas A. Lubik http://www.rbnz.govt.nz/research/discusspapers/dp2005.html#P24_1284

DP2005/07. Discretionary Policy, Potential Output Uncertainty, and Optimal Learning James Yetman http://www.rbnz.govt.nz/research/discusspapers/dp2005.html#P17_450

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DP2005/06 A Simple, Structural, and Empirical Model of the Antipodean Transmission Mechanism

Thomas A. Lubik

http://www.rbnz.govt.nz/research/discusspapers/dp2005.html#P24_1284

Abstract

This paper studies the transmission of business cycles and the sources of economic fluctuations in Australia and New Zealand by estimating a Bayesian DSGE model. The theoretical model is that of two open economies that are tightly integrated by trade in goods and assets. They can be thought of as economically large relative to each other, but small with respect to the rest of the world. The two economies are hit by a variety of country-specific and world-wide shocks. The main findings are that the pre-eminent driving forces of Antipodean business cycles are worldwide technology shocks and foreign, ie rest-of-the-world, expenditure shocks. Domestic technology shocks and monetary policy shocks appear to play only a minor role. Transmission of policy shocks is asymmetric, and neither central bank is found to respond to exchange rate movements. The model can explain 15 percent of the observed exchange rate volatility.

DP2005/07 Discretionary Policy, Potential Output Uncertainty, and Optimal Learning

http://www.rbnz.govt.nz/research/discusspapers/dp2005.html#P17_450

James Yetman

Abstract

We compare inflation targeting, price level targeting, and speed limit policies when a central bank sets monetary policy under discretion, and must learn about the level of potential output over time. We show that if the central bank learns optimally over time, a speed limit policy dominates [is dominated by] a price level target if society places a high [low] weight on inflation stability. Inefficient learning on the part of the central bank can radically change this conclusion. A speed limit policy is favoured if the central bank places too much weight on recent data when estimating potential output, while a price level target is favoured if the central bank places too much weight on historical data.

ENDS

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