A New Keynesian Perspective of Monetary Policy in Australia

We estimate a SVAR for the Australian economy based on an open economy New Keynesian model. Deep structural parameters are identified by placing exclusion restrictions on the VAR residuals and the covariance matrix. Parameter estimates suggest that the New Keynesian specification fits Australian data well. Dynamic responses show no price and exchange rate puzzles and indicate that the Reserve Bank of Australia (RBA) has a short-run focus on stabilizing output fluctuations while maintaining a medium-run inflation target since 1984. The RBA responds decisively to aggregate demand and exchange rate shocks while passively allowing the economy to self-correct aggregate supply shock.