Posted

May 30, 2016 12:33:18 PM

Date

2016-07

Author

Michelle Lewis and John McDermott

Affiliation

Reserve Bank of New Zealand

Title

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

Summary /
Abstract

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.

Keywords

Inflation target, inflation expectations

URL

http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Discussion%20papers/2016/dp16-07.pdf

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