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The Monetary Policy Rule in Australia: Does the RBA Target Inflation Only?

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Authors
Ahn, Changmo
Issue Date
2004-06
Publisher
Institute of International Affairs, Graduate School of International Studies, Seoul National University
Citation
Journal of International and Area Studies, Vol.11 No.1, pp. 23-37
Keywords
inflation targetingpolicy reaction functionAustralia
Abstract
This paper estimates a simple monetary policy reaction function for Australia. Although the reaction function is rather simple, it is shown to be able to capture the essential elements across different policy regimes. The empirical findings mostly corroborate the RBA’s own claims made through Reserve Bank Report and Financial Statements. During the pre-inflation targeting period (1985-1992), the RBA targeted external factors such as the current account deficit and the Federal Funds Rate, in addition to inflation. Over time, the policy focus has, however, become directed explicitly towards price stability. During the post announcement period (1990-1999), the RBA targeted only future inflation up to one-year ahead. As the forecast horizon became longer than one year, however, the RBA targeted short-run output fluctuations in order to allow medium-run expected inflation to adjust rather slowly to the medium-run target. The results show that, in a flexible inflation targeting regime, medium-term price stability can be maintained while allowing some scope for targeting output variability.
ISSN
1226-8550
Language
English
URI
http://hdl.handle.net/10371/96398
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Graduate School of International Studies (국제대학원)Dept. of International Studies (국제학과)Journal of International and Area StudiesJournal of International and Area Studies vol.11 (2004)
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