Evaluating Alternative Monetary Policy Rules for Australia

Abstract

We examine how the Reserve Bank of Australia (RBA)'s current monetary policy framework performs relative to alternative monetary policy rules in the Australian economy. Across macroeconomic environments and alternative loss function weighting schemes, nominal income targeting (NIT) delivers the lowest central bank loss, followed by strict inflation targeting (SIT) and the RBA Baseline Rule, while price‐level targeting (PLT) performs worst. Quantitatively, the RBA Baseline Rule generates a performance gap approximately three times that of NIT. The findings suggest scope for refinement in the current RBA monetary policy framework. Among the alternatives considered, NIT delivers robust performance across macroeconomic environments and policy objective specifications. These results provide empirical benchmarks that can inform the evaluation of alternative monetary policy designs in the Australian context. We develop a Multi‐Export‐Sector (MES) model for the Australian economy and use it to conduct counterfactual experiments on alternative monetary policy rules based on a central bank loss function.