Uncovering the Hit List for Small Inflation Targeters: A Bayesian Structural Analysis

Timothy Kam, Timothy Kam, Kirdan Lees, Philip Liu

    Research output: Contribution to journalArticle

    Abstract

    We estimate underlying structural macroeconomic policy objectives of three of the earliest explicit inflation targeters within the context of a small open economy dynamic stochastic general equilibrium model. We assume central banks set policy optimally, such that we can reverse engineer policy objectives from observed time series data. Joint tests of the posterior distributions of these policy preference parameters suggest that the central banks are very similar in their overall objective. None of the central banks show a concern for stabilizing the real exchange rate. All three central banks share a concern for minimizing the volatility in the change in the nominal interest rate. We also show that the resulting optimal policy rule responds to exchange rate movements, even in the case where the central banks do not explicitly care about exchange rate stabilization. This result is also corroborated by results from an alternative simple-rule characterization and estimation of central bank behavior. These last two findings point to the pitfalls of making inferences, from the level of ad hoc simple rules, about what central banks may care about.
    Original languageEnglish
    Pages (from-to)583-618
    JournalJournal of Money, Credit and Banking
    Volume41
    Issue number4
    DOIs
    Publication statusPublished - 2009

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