The Taylor rule in Australia

The Taylor rule in Australia

The Taylor rule is a rules based monetary policy whereby the policy maker reacts to inflation and output gaps in setting the policy instrument, usually a short term interest rate. It can be prescriptive or descriptive. This study examines whether the Taylor rule describes the behaviour of the Reserve Bank of Australia since 1996, a period encompassing the last two Governors of the RBA.
Using the traditional gap coefficients of .5 we find the implied Taylor cash rate , which then can be compared with the actual cash rate. The Taylor rule describes well the policymaking during the era of Governor Glenn Stevens, but does not describe as well the policymaking during the era of his predecessor. The study also determines the least squares estimates of the coefficients and finds that both the inflation and output coefficients exceed .5. A supplementary finding is that lagging the output and inflation gaps did not make any material difference.

Copyright © 2013 by the publisher. All rights reserved. No part of this publication can be reproduced in any form or by any means without the permission of the concerned author or the WBI.