New Zealand's experience with changing its inflation target and the impact on inflation expectations

Release date
20/05/2016
Reference
DP2016/07
Authors
Michelle Lewis; Dr John McDermott
Published as

Lewis, Michelle and John McDermott (2016). ‘New Zealand's experience with changing its inflation target and the impact on inflation expectations’, New Zealand Economic Papers, Taylor and Francis Journals, Volume 50(3), Pages 343-361. DOI: https://doi.org/10.1080/00779954.2016.1191529.

ISSN
1177-7567
We document the experience of the Reserve Bank of New Zealand in changing its inflation target, particularly the effects on inflation expectations. Firstly, the Reserve Bank of New Zealand's DSGE model is used to highlight expectation-formation in the transmission following a change in the inflation target. Secondly, a Nelson-Siegel model is used to combine a number of inflation expectation surveys into a continuous curve where expectations can be plotted as a function of the forecast horizon. Using estimates of long-run inflation expectations derived from the Nelson-Siegel model, we find that numerical changes in the inflation target result in an immediate change in inflation expectations.