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Article: DP2004/02: do inflation targeting central banks behave asymmetrically? Evidence from Australia and New Zealand.(Reserve Bank Discussion Papers)(Brief Article)
- Article from:
- The Reserve Bank of New Zealand Bulletin
- Article date:
- September 1, 2004
- Author:
CopyrightCOPYRIGHT 2004 Reserve Bank of New Zealand. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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This paper tests the standard quadratic approximation to central bank preferences on data from Australia and New Zealand, two of the earliest explicit inflation targeting countries. The standard linear-quadratic monetary policy model assumes central bank preferences over key macroeconomic variables, such as inflation and output, can be usefully approximated by a quadratic function. This approximation implies that a deviation from a target is considered to be equally costly irrespective of whether the deviation is positive or negative. Combined with a linear model of the economy, quadratic preferences are useful because they yield a first order condition that implies a ...
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