.0 Introduction Bank of New Zealand

1.0 Introduction With the achievement of low and relatively stable rates of inflation in many industrialised countries, research has been focused on monetary policy implementation strategies, as summarised by policy rules, that minimise the social loss associated with maintaining these hard-earned gains. This work has generally followed two approaches. The first approach, such as that followed in Svensson (1997), starts from a specification of social preferences and then solves for optimal policy rules conditional on a specific model of the economy. The second approach, such as that followed in Fuhrer (1994) and Black, Macklem and Rose (1997), recognises the difficulty in accurately assessing social preferences and has built on the Taylor (1979) concept of efficient policy rules. Given the model economy, this approach traces out the lowest combinations of inflation and output variance that are achievable by following simple policy rules. The work presented in this paper follows this latter approach and uses stochastic simulations of the Reserve Bank of New Zealand’s Forecasting and Policy System model (FPS) to trace out the efficient policy frontiers associated with three classes of simple policy rules.