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VARIABLE GSTl A TOOL FOR MONETARY POLICY IN NEW ZEALAND?

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  • Iris Claus

    ()

  • Brandon Sloan

    ()

Abstract

To help maintain price stability in New Zealand a countercyclical use of the goods and services tax (GST) has been proposed. This paper argues that a variable GST rate is unlikely to be a useful stabilisation tool for monetary policy. It first discusses some of the problems that would arise with the implementation of a variable GST rate. It then develops a stylised model of the New Zealand economy to assess the effects of using a variable GST rate as a monetary policy tool relative to the conventional instrument, an interest rate. The results show that a variable GST rate would be less effective in dampening business cycles than an interest rate. It would lead to larger adjustments in the policy instrument and fluctuations in the real economy and inflation. Moreover, a variable GST rate would produce greater welfare losses from monetary policy than an interest rate tool.

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File URL: http://cbe.anu.edu.au/research/papers/camawpapers/Papers/2008/Claus_Sloan_302008.pdf
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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2008-30.

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Length: 41 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:een:camaaa:2008-30

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  1. Bennett T. McCallum & Edward Nelson, 2001. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," NBER Working Papers 8175, National Bureau of Economic Research, Inc.
  2. McCallum, B.T. & Nelson, E., 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Papers 644, Stockholm - International Economic Studies.
  3. Julia Hall & Grant Scobie, 2005. "Capital Shallowness: A Problem for New Zealand?," Treasury Working Paper Series 05/05, New Zealand Treasury.
  4. repec:fth:bfdipa:18/2001 is not listed on IDEAS
  5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  6. Bob Buckle & Aaron Drew, 2006. "Testing stabilisation policy limits in a small open economy: editor's summary of a macroeconomic policy forum," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 9p, December.
  7. Huang, Angela & Margaritis, Dimitri & Mayes, David, 2001. "Monetary policy rules in practice: Evidence from New Zealand," Research Discussion Papers 18/2001, Bank of Finland.
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