Estimates of neutral interest rates play a useful role in thinking about monetary policy. This note explores the concept of a neutral interest rate and provides some simple empirical illustrations of the trend decline in neutral rates, here and abroad, over the last couple of decades.

The Balassa-Samuelson hypothesis suggests that countries with a weak relative productivity performance should, over time, see a low or falling real exchange rate. This note uses detailed sectoral data to test the hypothesis over the period 1978-2006 and also fails to find any evidence of the...

We estimate a Factor Augmented Vector autoregression (FAVAR) to identify idiosyncratic exchange rate shocks and examine the effects of these shocks on different sectors of the economy. We find that an unexpected shock to the exchange rate has significant effects on the tradable sector of the...

The exchange rate matters a lot in New Zealand and the Reserve Bank uses several different models, each imprecise, to analyse it. This note focuses on just one of those approaches: the macro-balance model of the exchange rate. We use that model to estimate the exchange rate which, if sustained,...

New Zealand's terms of trade have risen by 30 per cent in the last decade, raising national income by about 9 per cent. This note explores some of the economic consequences of the higher terms of trade.

The Taylor Rule is often used to describe simply how central banks adjust short-term interest rates in response to economic conditions. We use this approach to analyse monetary policy in New Zealand, Australia, and the United States since the early 1990s. We find that the response of monetary...

This paper looks at the boom period between 2000 and 2008 in the international prices of four internationally-traded commodities: oil, dairy products, beef and lamb. All are important drivers of macroeconomic dynamics in New Zealand. Our aim is to provide overviews of the demand and supply...

This paper examines the relationship between wages and consumer prices in New Zealand over the last 15 years. Reflecting the open nature of the New Zealand economy, the headline CPI is disaggregated into non-tradable and tradable prices. We find that there is a joint causality between wages and...

This paper discusses the potential for lenders’ capital requirements to be used as ‘automatic stabilisers’ of the business cycle in New Zealand. The procyclicality of lending, and its importance for cyclical developments, motivates the consideration of regulation of lending for...

Monetary policy has an important, but limited, role to play in providing a reasonably stable backdrop for real economic activity. Against that standard, the flexible inflation targeting approach that has guided New Zealand’s monetary policy for over 20 years served the country relatively well...