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Modelling structural change: the case of New Zealand

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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
Date of revision:
Handle: RePEc:nzb:nzbdps:2003/03

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  1. Rudebusch, Glenn D., 2000. "Assessing nominal income rules for monetary policy with model and data uncertainty," Working Paper Series, European Central Bank 0014, European Central Bank.
  2. van Els, Peter J. A. & Locarno, Alberto & Morgan, Julian & Villetelle, Jean-Pierre, 2001. "Monetary policy transmission in the euro area: What do aggregate and national structural models tell us?," Working Paper Series, European Central Bank 0094, European Central Bank.
  3. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange rate pass-through into import prices: a macro or micro phenomenon?," Staff Reports, Federal Reserve Bank of New York 149, Federal Reserve Bank of New York.
  4. Hendry, David F. & Clements, Michael P., 2001. "Economic forecasting: some lessons from recent research," Working Paper Series, European Central Bank 0082, European Central Bank.
  5. Greenslade, Jennifer V. & Hall, Stephen G., 1996. "Modelling economies subject to structural change: The case of Germany," Economic Modelling, Elsevier, Elsevier, vol. 13(4), pages 545-559, October.
  6. Meredith Beechey & Nargis Bharucha & Adam Cagliarini & David Gruen & Christopher Thompson, 2000. "A Small Model of the Australian Macroeconomy," RBA Research Discussion Papers, Reserve Bank of Australia rdp2000-05, Reserve Bank of Australia.
  7. 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, Reserve Bank of New Zealand, vol. 64, September.
  8. Brooks, Ray & Gibbs, Darren, 1994. "A model of the New Zealand economy Reserve Bank Model XII," Economic Modelling, Elsevier, Elsevier, vol. 11(1), pages 5-86, January.
  9. Aaron Drew & Ben Hunt, 1998. "The Forecasting and Policy System: preparing economic projections," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand G98/7, Reserve Bank of New Zealand.
  10. Glenn D. Rudebusch, 1999. "Is the Fed too timid? Monetary policy in an uncertain world," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 99-05, Federal Reserve Bank of San Francisco.
  11. Barassi, Marco R. & Caporale, Guglielmo Maria & Hall, Stephen G., 2005. "Interest rate linkages: a Kalman filter approach to detecting structural change," Economic Modelling, Elsevier, Elsevier, vol. 22(2), pages 253-284, March.
  12. W A Razzak, 2002. "Monetary policy and forecasting inflation with and without the output gap," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP2002/03, Reserve Bank of New Zealand.
  13. 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, Elsevier, vol. 21(7), pages 1149-1171, June.
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Cited by:
  1. Luis Fernando melo V. & Martha Misas A., . "Modelos Estructurales de Inflación en Colombia: Estimación a traves de Minimos Cuadrados Flexibles," Borradores de Economia, Banco de la Republica de Colombia 282, Banco de la Republica de Colombia.
  2. 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, Reserve Bank of New Zealand DP2008/03, Reserve Bank of New Zealand.
  3. Nils Björksten & Özer Karagedikli, 2003. "Neutral real interest rates revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 66, pages 11, September.
  4. 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, New Zealand Treasury 03/25, New Zealand Treasury.
  5. 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, Reserve Bank of New Zealand DP2006/04, Reserve Bank of New Zealand.
  6. 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, Reserve Bank of New Zealand DP 2004/01, Reserve Bank of New Zealand.

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