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Calm after the Storm?: Supply-side contributions to New Zealand’s GDP volatility decline

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Abstract

The variance of New Zealand’s real GDP has declined since the mid-1980s. To investigate why, this paper decomposes the variance of chain-weighted estimates of production-based real GDP growth into sector shares, sector growth rate variances and co-variances. The principal explanation for the decline in GDP volatility is a fall in the sum of sector variances driven by a decline in the Services and Manufacturing sector production growth variances. Sector co-variances have had a dominant influence on the profile of GDP volatility and this influence has not diminished. Despite marked changes in sector shares, notably increases in Services and Primary sector shares and a decrease in the share of Manufacturing, this has not been a significant factor influencing the decline in GDP volatility. We postulate that policy interventions such as “Think Big”, regulatory interventions during the early 1980s, and the introduction of GST are key explanations for the higher volatility until the mid 1980s. Cessation of these interventions, deregulation and possibly changes in inventory management methods are important reasons why GDP volatility has fallen since then.

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File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2001/01-33/twp01-33.pdf
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Bibliographic Info

Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 01/33.

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Length: 37 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:nzt:nztwps:01/33

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Keywords: Volatility; growth; production sector shares; manufacturing; services; primary; construction.;

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References

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  1. Francisco Nadal-De Simone, 2001. "An Investigation of Output Variance Before and During Inflation Targeting," IMF Working Papers, International Monetary Fund 01/215, International Monetary Fund.
  2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 37(4), pages 1661-1707, December.
  3. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  4. Chang-Jin Kim & Charles R. Nelson, 1999. "Has The U.S. Economy Become More Stable? A Bayesian Approach Based On A Markov-Switching Model Of The Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 608-616, November.
  5. Mark W. Watson, 1992. "Business Cycle Durations and Postwar Stabilization of the U.S. Economy," NBER Working Papers 4005, National Bureau of Economic Research, Inc.
  6. Glenn Otto & Graham Voss & Luke Willard, 2001. "Understanding OECD Output Correlations," RBA Research Discussion Papers, Reserve Bank of Australia rdp2001-05, Reserve Bank of Australia.
  7. John Simon, 2001. "The Decline in Australian Output Volatility," RBA Research Discussion Papers, Reserve Bank of Australia rdp2001-01, Reserve Bank of Australia.
  8. John Taylor, 2000. "Recent changes in trend and cycle, remarks," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  9. Romer, Christina D, 1991. "The Cyclical Behavior of Individual Production Series, 1889-1984," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(1), pages 1-31, February.
  10. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  11. Romer, Christina D, 1986. "Is the Stabilization of the Postwar Economy a Figment of the Data?," American Economic Review, American Economic Association, American Economic Association, vol. 76(3), pages 314-34, June.
  12. Viv Hall & Kunhong Kim & Robert Buckle, 1998. "Pacific rim business cycle analysis: Synchronisation and volatility," New Zealand Economic Papers, Taylor & Francis Journals, Taylor & Francis Journals, vol. 32(2), pages 129-159.
  13. Martin Neil Baily, 1978. "Stabilization Policy and Private Economic Behavior," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(1), pages 11-60.
  14. Margaret M. McConnell & Patricia C. Mosser & Gabriel Perez Quiros, 1999. "A decomposition of the increased stability of GDP growth," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 5(Aug).
  15. John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 14(3), pages 21-36, Summer.
  16. Allsop, Christopher & Vines, David, 2000. "The Assessment: Macroeconomic Policy," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 16(4), pages 1-32, Winter.
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Cited by:
  1. Grimes, Arthur, 2006. "A smooth ride: Terms of trade, volatility and GDP growth," Journal of Asian Economics, Elsevier, Elsevier, vol. 17(4), pages 583-600, October.
  2. Iris Claus, 2003. "Changes in New Zealand's Production Structure: An Input Output Analysis," Treasury Working Paper Series, New Zealand Treasury 03/01, New Zealand Treasury.
  3. Peter Mawson, 2002. "Measuring Economic Growth in New Zealand," Treasury Working Paper Series, New Zealand Treasury 02/14, New Zealand Treasury.
  4. Claudia M. Buch & Joerg Doepke & Christian Pierdzioch, 2002. "Business Cycle Volatility in Germany," Kiel Working Papers, Kiel Institute for the World Economy 1129, Kiel Institute for the World Economy.
  5. Edda Claus & Iris Claus, 2005. "New Zealand'S Economic Reforms And Changing Production Structure," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2005-16, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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