Discussion Paper on Inflation

A new discussion paper by Michelle Lewis and John McDermott has been published on the Reserve Bank’s website.

DP2016/07: New Zealand’s experience with changing its inflation target and the impact on inflation expectations.

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.

The paper is available for download at

http://www.rbnz.govt.nz/research-and-publications/discussion-papers/2016/dp2016-07

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