Monetary Policy Easing and the Distribution of Wealth in New Zealand

The paper investigates the effect of monetary policy shocks on the distribution of wealth using a stylised model of the New Zealand economy. We find that a 50 basis point reduction in the OCR leads to a more equal distribution of wealth in the economy – with the Gini coefficient falling by approximately 0.5 percentage points. This drop occurs gradually and reaches its trough after 5 quarters, remaining persistently lower thereafter. NB. The key missing channel in the model used in this Analytical Note is asset prices, which may also change following a monetary policy shock - this is the portfolio composition (capital gains) channel, which will be investigated in future work. In New Zealand there has been a sharp increase in house prices over the past 18 months, in part due to lower mortgage interest rates. This research aims to take initial steps in analysing the distributional implications of low interest rates by building a macroeconomic model that captures changes in savings and income flows of different households. The version of the model used in this note does not yet capture the impact of capital gains, but future versions will aim to cast more light on asset prices. About the research programme: The Reserve Bank is carrying out a wide range of research about the different ways changes in interest rates could affect the distribution of wealth and income in New Zealand. Each research paper is aimed at giving the bank (and other decision-makers) parts of the jigsaw puzzle, to help our understanding, rather than a complete picture all at once.