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The impact of monetary policy on New Zealand business cycles and inflation variability

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  • Nathan McLellan
  • Robert A Buckle
  • Kunhong Kim

Abstract

This paper uses the open economy structural VAR model developed in Buckle, Kim, Kirkham, McLellan and Sharma (2002) to evaluate the impact of monetary policy on New Zealand business cycles and inflation variability and the output/inflation variability trade-off. The model includes a forward-looking Taylor Rule to identify monetary policy and the impact of monetary policy is evaluated by deriving a monetary policy index using a procedure suggested by Dungey and Pagan (2000). Monetary policy has generally been counter-cyclical, thereby reducing business cycles and inflation variability. Exceptions are in 1994 and 1995 when monetary policy accentuated the business cycle upswing and in 1998 when monetary policy accentuated the recession, although its impact in 1998 was small relative to the impact of adverse climatic conditions. During the initial years of inflation targeting monetary policy tended to simultaneously reduce inflation and output variability. From 1996 to 2001 monetary policy was less effective in reducing inflation and output variability. This latter period included a brief experiment with a Monetary Conditions Index, the Asian crisis and a large adverse domestic climate sho

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 594.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:594

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Keywords: Monetary policy; inflation targeting; business cycles; open economy; structural VAR models; inflation; interest rates; exchange rates; climate; international linkages;

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References

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  1. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  2. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
  3. Timothy Cogley & James M. Nason, 1993. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series: implications for business cycle research," Working Papers in Applied Economic Theory 93-01, Federal Reserve Bank of San Francisco.
  4. Iris Claus & Christie Smith, 1999. "Financial intermediation and the monetary transmission mechanism," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, December.
  5. Robert Amano & Don Coletti & Tiff Macklem, 1998. "Monetary rules when economic behaviour changes," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  6. Olivier J. Blanchard & Mark W. Watson, 1986. "Are Business Cycles All Alike?," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 123-180 National Bureau of Economic Research, Inc.
  7. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
  8. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  9. Paul Conway, 1998. "Macroeconomic variability in New Zealand: An SVAR study," New Zealand Economic Papers, Taylor & Francis Journals, vol. 32(2), pages 161-186.
  10. Hans-Jurgen Engelbrecht & Robin Loomes, 2002. "The unintended consequences of using an MCI as an operational monetary policy target in New Zealand: Suggestive evidence from rolling regressions," New Zealand Economic Papers, Taylor & Francis Journals, vol. 36(2), pages 217-233.
  11. Robert J. Gordon, 1986. "The American Business Cycle: Continuity and Change," NBER Books, National Bureau of Economic Research, Inc, number gord86-1, May.
  12. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  13. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  14. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
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Cited by:
  1. Philip Liu, 2006. "A Small New Keynesian Model of the New Zealand economy," Reserve Bank of New Zealand Discussion Paper Series DP2006/03, Reserve Bank of New Zealand.
  2. Arthur Grimes, 2005. "Regional and Industry Cycles in Australasia: Implications for a Common Currency," Macroeconomics 0509020, EconWPA.
  3. K. Arin & Sam Jolly, 2005. "Trans-Tasman Transmission of Monetary Shocks: Evidence From a VAR Approach," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(3), pages 267-283, September.
  4. Özer Karagedikli & Rishab Sethi & Christie Smith & Aaron Drew, 2008. "Changes in the transmission mechanism of monetary policy in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/03, Reserve Bank of New Zealand.
  5. Alfred A Haug & Christie Smith, 2007. "Local linear impulse responses for a small open economy," Reserve Bank of New Zealand Discussion Paper Series DP2007/09, Reserve Bank of New Zealand.

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