Optimal Monetary Policy Rules and Inflation Targets: Are Australia, Canada, and New Zealand Different from the Us?

Abstract

Stylized facts suggest that the monetary policies in the US versus dollar bloc countries that formally target inflation (Australia, Canada, and New Zealand) place somewhat different emphasis on inflation than on other factors (e.g., output gap). We use parameter estimated from versions of models that each of the central banks under study actually use and find that while monetary policies in these countries were different in early 1990s, fewer differences are apparent beginning in the second half of the 1990s. Moreover, we conclude that all four central banks practice heavy interest rate smoothing.

Keywords: Optimal rules, inflation targeting, interest rate smoothing

JEL Classification: E52, E58, C32, C61