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Modelling structural change: the case of New Zealand

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Author Info
Olivier Basdevant
David Hargreaves (Reserve Bank of New Zealand)

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Abstract

This paper documents the Reserve Bank of New Zealand's current approach to dealing with structural change, an important feature of New Zealand's recent macroeconomic history after the profound economic reforms undergone in the past twenty years. Traditional estimated macroeconomic models of New Zealand have broken down over time, which led to the mid 1990's creation of the Forecasting and Policy System (FPS). In this paper, we analyse why the FPS has proved more robust to structural change and discuss steps we are taking to develop carefully chosen alternative models to complement FPS. Because those alternative models are clearly subject to structural change as well, in developing them we have looked hard at estimation approaches that allow for structural instability. In this paper, we document the results of subjecting some key nominal relationships to stability tests and explicit modelling of structural change. We find preliminary evidence that New Zealand's inflation targeting regime has caused structural shifts in pricing behaviour and expectations formation.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2003/03.

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Length: 27p
Date of creation: Apr 2003
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Handle: RePEc:nzb:nzbdps:2003/03

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Find related papers by JEL classification:
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. David F. Hendry & Michael P. Clements, 2001. "Economic forecasting: some lessons from recent research," Working Paper Series 082, European Central Bank. [Downloadable!]
    Other versions:
  2. Joanne Archibald & Leni Hunter, 2001. "What is the neutral real interest rate, and how can we use it?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, September. [Downloadable!]
  3. Aaron Drew & Ben Hunt, 1998. "The Forecasting and Policy System: preparing economic projections," Reserve Bank of New Zealand Discussion Paper Series G98/7, Reserve Bank of New Zealand. [Downloadable!]
  4. Garratt, Anthony & Hall, Stephen G., 1997. "E-equilibria and adaptive expectations: Output and inflation in the LBS model," Journal of Economic Dynamics and Control, Elsevier, vol. 21(7), pages 1149-1171, June. [Downloadable!] (restricted)
  5. Glenn Rudebusch, 2000. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Econometric Society World Congress 2000 Contributed Papers 0065, Econometric Society. [Downloadable!]
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  6. Julian Benedict Morgan & Alberto Locarno & Jean-Pierre Villetelle & Peter van Els, 2001. "Monetary policy transmission in the Euro area: what do aggregate and national structural models tell us?," Working Paper Series 094, European Central Bank. [Downloadable!]
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  7. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. W A Razzak, 2002. "Monetary policy and forecasting inflation with and without the output gap," Reserve Bank of New Zealand Discussion Paper Series DP2002/03, Reserve Bank of New Zealand. [Downloadable!]
  9. Meredith Beechey & Nargis Bharucha & Adam Cagliarini & David Gruen & Christopher Thompson, 2000. "A Small Model of the Australian Macroeconomy," RBA Research Discussion Papers rdp2000-05, Reserve Bank of Australia. [Downloadable!]
  10. Brooks, Ray & Gibbs, Darren, 1994. "A model of the New Zealand economy Reserve Bank Model XII," Economic Modelling, Elsevier, vol. 11(1), pages 5-86, January. [Downloadable!] (restricted)
  11. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May. [Downloadable!] (restricted)
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  12. Barassi, Marco R. & Caporale, Guglielmo Maria & Hall, Stephen G., 2005. "Interest rate linkages: a Kalman filter approach to detecting structural change," Economic Modelling, Elsevier, vol. 22(2), pages 253-284, March. [Downloadable!] (restricted)
  13. Greenslade, Jennifer V. & Hall, Stephen G., 1996. "Modelling economies subject to structural change: The case of Germany," Economic Modelling, Elsevier, vol. 13(4), pages 545-559, October. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Olivier Basdevant & Nils Björksten & Özer Karagedikli, 2004. "Estimating a time varying neutral real interest rate for New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP 2004/01, Reserve Bank of New Zealand. [Downloadable!]
  2. Kam Leong Szeto & Paul Gardiner & Richard Gray & David Hargreaves, 2003. "A Comparison of the NZTM and FPS Models of the New Zealand Economy," Treasury Working Paper Series 03/25, New Zealand Treasury. [Downloadable!]
  3. Luis Fernando Melo Velandia & Martha Alicia Misas Arango, 2004. "Modelos Estructurales de Inflación en Colombia: Estimación a través de Mínimos Cuadrados Flexibles," BORRADORES DE ECONOMIA 003244, BANCO DE LA REPÚBLICA. [Downloadable!]
    Other versions:
  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. [Downloadable!]
  5. Nils Björksten & Özer Karagedikli, 2003. "Neutral real interest rates revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 66, pages 11, September. [Downloadable!]
  6. James Twaddle & David Hargreaves & Tim Hampton, 2006. "Other stabilisation objectives within an inflation targeting regime: Some stochastic simulation experiments," Reserve Bank of New Zealand Discussion Paper Series DP2006/04, Reserve Bank of New Zealand. [Downloadable!]
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