Interest rate smoothing in New Zealand and other dollar bloc countries

Release date
01/12/2000
Reference
DP2000/10
Authors
Aaron Drew; L. Christopher Plantier
This paper utilises the partial adjustment approach of Judd and Rudebusch (1998) to empirically estimate the degree of short-term interest rate smoothing by central banks in the dollar block countries. All countries appear to smooth short-term interest rates significantly, with New Zealand and Canada smoothing rates by less than what appears to be the case for Australia and the United States. We then examine the macroeconomic implications of interest rate smoothing using the Reserve Bank of New Zealand's macro model. The model is constructed such that the more interest rates are smoothed in the short-term, the larger inflation and output variability will be over the cycle. However, at least over the narrow range of the empirically based smoothing approaches, the results suggest that there may be little cost in smoothing short-term interest rates in New Zealand to the degree seen in Australia or the United States.