Survey Expectations of Monetary Conditions in New Zealand: Determinants and Implications for the Transmission of Policy (original) (raw)
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Using Measures of Expectations to Identify the Effects of a Monetary Policy Shock
International Finance Discussion Paper
This paper considersan alternativeeconometricapproach to the VAR methodologyfor identifyingand estimatingthe effects of monetary policy shocks. The alternativeapproach incorporates availablemeasuresof market participants'expectationsof economicvariables in order to calculateeconomicinnovationsto those variables. In general, expectationsmeasures should provide important additionalinformationrelative to a standard VAR analysis, since market participants presumably use a much richer informationset than that assumed in a typical VAR model. The resulting innovationsare easily incorporatedin a VAR-like fimework. The empirical results are quite surprising. First, when expectationsare incorporated,the variance of all innovationsis reduced substantially. Second, innovationsto the federal funds rate derived using the alternativeapproach are only somewhatcorrelatedwith their VAR counterparts, while innovationsto other economicvariables are essentiallyuncorrelated. Still, monetary policy shoch derived using the two approachesare a(so somewhatcorrelated, since innovationsto prices and economic activity explainonly a small fraction of innovationsto the fderal funds rate. As a consequence,the impulseresponsesof economicvariables to the two sets of monetary policy shocks have remarkably similar properties. Using Measures of Expectations to Identi& the Effects of a Monetary Policy Shock Allan D. Brunnerl I. Introduction Vectorautoregressive (VAR) models, popularizedby Sims (1980), have been used widely and extensivelyby economiststo study the dynamic behaviorof economicvariables. The appeal of VAR models is likely due to severalattractivefeatures relative to other econometric modeling approaches. These features include a minimum number of identi~ing restrictions, few exogenousvariables,and an ease of implementation. Still, the use of a VAR model requires a few strong assumptionsabout the availabilityof informationto economicagents, some of which are also common to other moreoveridentifiedeconometricmodels. This paper considersan alternativeapproach that address some possible shoticomingsof the VAR approach,while maintainingmany of its appealing features. The estimationof a structuralVAR m~el generally requires two steps. First, a vector of economic variables,~, is regressed on several lags of itself. The set of lagged variables (dated t-1 and earlier) is assumed to be a good proxy for the information set that is available to economic agents just prior to the determination of Xt. As a consequence, VAR residuals are interpreted as economic innovations, new informationabout Xt that becomesavailableat time t. In the second step of estimation, the innovationsare decomposedinto orthogonalshoch using one of several methods. These shocks are ofien given a structuralor behavioralinterpretation. This paper is concernedprimarily with two implicit assumptionsthat are made in the first step 1 The author is an economistin the InternationalFinance Division, Board of Governors of the Federal Reserve System. The author would like to thank Neil Ericsson, Bill Helkie, Dale Henderson, and workshop participantsat the Board of Governorsfor usefil commentson earlier versions of this paper. He is also grateful to Larry Christian, Charlie Evans, Christian Gilles, Vincent Reinha.rt,and Glenn Rudebuschfor helpfil discussionsand to AthanasiosOrphanidesand James Walsh for providing the MMS data. This paper representsthe views of the author and should not be interpretedas reflecting the views of the Board of Governorsof the Federal Reserve System or other member of its staff. The author is responsiblefor any errors.
Monetary Policy Rules in Practice: Evidence from New Zealand
SSRN Electronic Journal, 2000
We use the ten years of experience in inflation-targeting in New Zealand since 1989 to test whether monetary policy appears to conform to the simple rules that have been recommended for it in the literature. Of the inflation targeting central banks, the Reserve Bank of New Zealand has both the longest experience and probably the most clearly defined target and policy framework for achieving it. We show that while a Taylor rule with the standard parameters used in the US does indeed describe New Zealand monetary policy quite well, the Reserve Bank has focused rather more strongly on price stability, as required by its Policy Target Agreements. However, while the conduct of New Zealand monetary policy as set out in the Monetary Policy Statements is firmly based on targeting the inflation rate in the future we find, using the Bank's own forecasts, that nevertheless targeting inflation close to the present appears to be a better description of policy. Furthermore, restricting the policy choice to the information available to the Reserve Bank at the actual time of policy settings and ignoring subsequent revisions to published statistics does not result in a much improved explanation of its actions. We find a clear 'smoothing' element to the Bank's policy rather than immediate response to every small fluctuation. We show further that some of the variables that enter the policy rule have slightly asymmetric cycles. From symmetric and asymmetric cointegration tests on the long-run relationship between interest rates, the output gap, and inflation we show that there is insufficient evidence to suggest that monetary policy has been asymmetric in treating upside inflationary pressures differently from those towards deflation.
Expectations and the Effects of Monetary Policy
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This paper examines the predictive power of shifts in monetary policy, as measured by changes in the real federal funds rate, for output, inflation, and survey expectations of these variables. We find that policy shifts have larger effects on
The Role of Expectations in Monetary Policy
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Recent literature on monetary policy has emphasised the role of expectations and the merits of tying them down through credible commitment. However, although always in favour of reaping the bene…ts of having committed, Central Banks worry about the fact that in real time, it is not always easy to assume that they are in such a position. Decisions need to be taken then, under the assumption of predetermined expectations. We argue that in these circumstances, the provision of clear in ‡ation objectives helps agents understand Central Bank objectives better and is thus bene…cial to all.
2001), “Monetary policy rules in practice: evidence from New Zealand,” Multinational Finance
2011
Ten years of inflation targeting in New Zealand is used to test whether monetary policy conforms to the simple rules that have been recommended in the literature. While a Taylor rule with the standard parameters used in the US describes New Zealand monetary policy quite well, the Reserve Bank has focused more strongly on price stability, as required by its Policy Targets Agreements. Monetary policy is better described by targeting the future inflation rate as forecast by the Bank than by current inflation as in the Taylor rule. However, restricting the description of policy to the information available at the time of setting policy does not result in a much-improved explanation. There is a ‘smoothing ’ element to the Bank’s policy rather than an immediate response to every small fluctuation. There is also insufficient evidence to suggest that monetary policy has been asymmetric in treating upside inflationary pressures differently from those towards deflation.
Testing the Rationality of the National Bank of New Zealand’s Survey Data 1
We test the rationality of the National Bank of New Zealand's survey data of inflation expectations. We cannot reject the null hypotheses of unbiasedness, efficiency, and orthogonality for a sample from 1985Q1 to 1996Q4. The survey's predictive power is better than those of the random walk and ARIMA models. During the period 1992q1-1996q1, where inflation is low and stable, the predictive power of an ARIMA model is better than that of the survey data, and the predictive power of the survey data is as good as that of the random walk model. These results are not inconsistent with rationality.
2001
We use the ten years of experience in inflation-targeting in New Zealand since 1989 to test whether monetary policy appears to conform to the simple rules that have been recommended for it in the literature. New Zealand has both the longest experience and probably the most clearly defined target and policy framework for achieving it. We show that while a Taylor rule with the standard parameters used in the US does indeed describe New Zealand monetary policy quite well, the Reserve Bank has focused rather more strongly on price stability, as required by its Policy Target Agreements. However, while the conduct of New Zealand monetary policy as set out in the Monetary Policy Statements is firmly based on targeting the inflation rate in the future we find, using the Bank’s own forecasts, that nevertheless inflation close to the present appears to be a good description of policy. Furthermore, restricting the description of policy to the information available to the Reserve Bank at the ac...
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Managing expectations by words and deeds: monetary policy in Asia and the Pacific
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Monetary Policy Evaluation using a Rational Expectations Model: the UK case
EconStor Research Reports, 2016
This study follows Rotemberg and Woodford (1998) and estimates a three-equation model of output, interest rate and inflation, in order to evaluate alternative rules by which the UK monetary authority may decide on setting the main interest rate. As in the original paper, the model setup is a rational-expectations setup, augmented with nominal price-setting frictions a la Calvo (1983). The model-generated impulse responses match quite well the estimated responses to a monetary shock. In addition, when additional technology and taste shocks are added, the theoretical model can account for the fluctuations in the UK data as well as an unrestricted VAR(1) does.