Monetary policy, inflation, and inflation volatility in Australia

This article presents an overview of monetary policy in Australia and highlights the persistence and volatility of inflation under successive monetary policy regimes, 1950-2010. A series of unit root tests specified both linearly and nonlinearly investigate whether inflation persistence has the characteristic of a unit root. The overall results for the full sample period, 1950-2010, and two subsample periods, 1970-2010 and 1993-2010, suggest that Australia's high inflation persistence does not incorporate a unit root, with the post-1993 analysis most emphatically yielding the result. High inflation persistence and volatility in Australia suggest that inflationary shock takes a long time to dissipate but does not permanently alter the low average level of inflation. The empirical results suggest that inflation and inflation volatility have a feedback relation while inflation volatility affects the rates of economic growth and unemployment.