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Estimated policy rules for different monetary regimes: Flexible inflation targeting versus a dual mandate

Punnoose Jacob, Amber Wadsworth

The Reserve Bank of New Zealand (RBNZ) has had a single price-stability mandate for monetary policy since February 1990. This mandate is set to be extended due to the RBNZ (Monetary Policy) Amendment Bill that is currently before parliament and that seeks to add employment to the RBNZ’s mandate. The Federal Reserve System in the United States (Federal Reserve) also has a dual mandate for monetary policy.

In this paper we compare the responses of monetary policy to inflation and economic activity in New Zealand and the United States. We estimate how monetary policy in New Zealand responded to inflation and economic activity using the data available to policy makers at each point in time from 2000 through 2017. We then compare these estimates to similar estimates for the United States and assess how monetary policy settings have evolved over time.

We find that, on average, monetary policy in New Zealand and the United States has responded to changes in economic activity and inflation in similar ways. Our findings show that the RBNZ has stabilised measures of economic activity, i.e. the output gap and output growth, to a similar extent to that of the Federal Reserve. This is despite the RBNZ not operating under a dual mandate.

A potential explanation for this result is that the flexibility of the RBNZ’s inflation targeting strategy over history has allowed it to stabilise economic activity while maintaining the broader emphasis on price stability.