*The authors wish to thank Richard Froyen, Robin Harrison, John Tatom, seminar participants at La Trobe University, Universität Graz, and Victoria University of Wellington, NZAE and WEA conference participants, and in particular two anonymous referees and the editor of this journal for their helpful comments. The first author expresses his gratitude to the Swiss National Bank for its hospitality and excellent research support. We are obliged to Tommaso Mancini and Nicholas Cuche-Curti for introducing us to DYNARE. The authors take full responsibility for any errors. The views expressed in this paper are those of the authors alone and should not be interpreted as reflecting the official position of the Reserve Bank of New Zealand on policy matters.
Practical Monetary Policies*
Article first published online: 13 APR 2010
© 2010 Blackwell Publishing Ltd
Volume 13, Issue 1, pages 25–53, Spring 2010
How to Cite
Guender, A. V. and Gillmore, D. R. (2010), Practical Monetary Policies. International Finance, 13: 25–53. doi: 10.1111/j.1468-2362.2010.01258.x
- Issue published online: 13 APR 2010
- Article first published online: 13 APR 2010
This paper compares a monetary policy that targets average inflation with one that targets the change in the output gap. It shows that the stabilizing properties of monetary policy strategies are sensitive to both the existence of lags in the transmission mechanism and the design of target rules. A strategy focusing on the change in the output gap is likely to prove inferior to targeting the average rate of inflation in a model where monetary policy affects the real economy sooner than inflation. Even more favourable results for average inflation targeting emerge in a framework that also includes forward-looking expectations. These results stand in marked contrast to those in standard models where policy lags are absent. To ensure sound choice of policy, central banks are advised to examine the stabilizing properties of monetary policies in a variety of models.