Asymmetric monetary policy rules in Australia

Abstract

ABSTRACTIn this study, the hypothesis that the Reserve Bank of Australia (RBA) implements an asymmetric monetary policy rule is tested. We estimate both linear and asymmetric monetary policy reaction functions for the period before inflation targeting was adopted, for the period when inflation targeting was explicitly adopted and for the full sample period. The results of the linear monetary policy rules are consistent with the estimates reported from other studies that estimate linear monetary policy rules for Australia. On the other hand, the results of estimating the asymmetric monetary policy rules for the pre-inflation targeting period shows that the RBA had reacted symmetrically, suggesting that it had acted with the same aggressiveness towards both inflation and output gaps of the same magnitude, over both phases of the business cycle. However, for the inflation targeting period, the results show that the RBA had reacted asymmetrically in its policy response to the inflation gap, output gap or both. A similar result is found for the full sample period. This asymmetric response supports the view that a non-linear monetary policy rule emanated from asymmetric preferences, rather than from the existence of a non-linear Phillips curve.