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The Regional Appropriateness of Monetary Policy: An Application of Taylor’s Rule to Australian States and Territories: Discussion Paper No 115

Hernandez, Javier & Layton, Allan P. (2002) The Regional Appropriateness of Monetary Policy: An Application of Taylor’s Rule to Australian States and Territories: Discussion Paper No 115. [Working Paper]

Abstract

In recent years Taylor’s rule has become a widely used tool for assessing the stance of monetary policy. Not only has it been used to evaluate the U.S. Federal Reserve’s monetary policy, but also, for example, to evaluate the appropriateness of the European Central Bank’s monetary policy for each individual member nation of the European Monetary Union. This paper builds on this work and uses Taylor’s rule to evaluate the degree of appropriateness of Australia’s national monetary policy to each of Australia’s states and territories. National monetary policy is represented by the overnight cash rate and this is compared to a notional cash rate calculated for each individual state and territory. The aim is to illustrate the extent to which national monetary policy historically may have deviated from what might have been most appropriate for the economic conditions of each state and territory. To this end, three different recent monetary policy episodes are analysed from a regional perspective. Moreover, an analysis of the disparities between the Australian states’ and territories’ notional cash rates with the actual national cash rate suggests – perhaps not too surprisingly - that the Reserve Bank of Australia implicitly sets national cash rates in close accordance with the economic conditions of Australia’s two most populous states.

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ID Code: 521
Item Type: Working Paper
Additional URLs:
Keywords: Taylor’s rule, monetary policy, Reserve Bank of Australia, regional appropriateness of national monetary policy, short, term interest rates
ISSN: 1324-5910
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Financial Economics (140207)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2002 (Please consult author)
Deposited On: 08 Nov 2004
Last Modified: 05 Jan 2011 23:24

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