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The impact of monetary policy on New Zealand business cycles and inflation variability

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Author Info

  • Robert A Buckle

    ()

  • Kunhong Kim

    ()

  • Nathan McLellan

    () (The Treasury)

Abstract

This paper uses the open economy structural VAR model developed in Buckle, Kim, Kirkham, McLellan and Sharma (2002) to evaluate the impact of monetary policy on New Zealand business cycles and inflation variability and the output/ inflation variance trade-off. The model includes a forward- looking Taylor Rule to identify monetary policy and the impact of monetary policy is evaluated by deriving a monetary policy index using a procedure suggested by Dungey and Pagan (2000). Monetary policy has generally been counter-cyclical, thereby reducing business cycles and inflation variability. Exceptions are in 1993 when monetary policy accentuated the business cycle upswing and in 1998 when monetary policy accentuated the recession, although its impact in 1998 was small relative to the impact of adverse climatic conditions. During the initial years of inflation targeting monetary policy tended to simultaneously reduce inflation and output variability. From 1996 to 2001 monetary policy was less effective in reducing inflation and output variability. This latter period included a brief experiment with a Monetary Conditions Index, the Asian crisis and a large adverse domestic climate shock.

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Bibliographic Info

Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 03/09.

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Length: 34 pages
Date of creation: Mar 2003
Date of revision:
Handle: RePEc:nzt:nztwps:03/09

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Phone: +64-4-472 2733
Fax: +64-4-473 0982
Web page: http://www.treasury.govt.nz
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Related research

Keywords: Monetary policy; inflation targeting; business cycles; open economy; structural VAR models; inflation; interest rates; exchange rates; climate; international linkages;

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References

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  1. Amano, Robert & Coletti, Don & Macklem, Tiff, 1999. "Monetary Rules When Economic Behaviour Changes," Working Papers 99-8, Bank of Canada.
  2. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  3. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  4. Iris Claus & Christie Smith, 1999. "Financial intermediation and the monetary transmission mechanism," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, December.
  5. Robert J. Gordon, 1986. "The American Business Cycle: Continuity and Change," NBER Books, National Bureau of Economic Research, Inc, number gord86-1, July.
  6. David O. Cushman & Tao Zha, 1995. "Identifying monetary policy in a small open economy under flexible exchange rates," Working Paper 95-7, Federal Reserve Bank of Atlanta.
  7. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  8. Timothy Cogley & James M. Nason, 1993. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series: implications for business cycle research," Working Papers in Applied Economic Theory 93-01, Federal Reserve Bank of San Francisco.
  9. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
  10. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
  11. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
  12. Olivier J. Blanchard & Mark W. Watson, 1986. "Are Business Cycles All Alike?," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 123-180 National Bureau of Economic Research, Inc.
  13. Paul Conway, 1998. "Macroeconomic variability in New Zealand: An SVAR study," New Zealand Economic Papers, Taylor and Francis Journals, vol. 32(2), pages 161-186.
  14. Hans-Jurgen Engelbrecht & Robin Loomes, 2002. "The unintended consequences of using an MCI as an operational monetary policy target in New Zealand: Suggestive evidence from rolling regressions," New Zealand Economic Papers, Taylor and Francis Journals, vol. 36(2), pages 217-233.
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Cited by:
  1. K. Arin & Sam Jolly, 2005. "Trans-Tasman Transmission of Monetary Shocks: Evidence From a VAR Approach," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(3), pages 267-283, September.
  2. Arthur Grimes, 2005. "Regional and Industry Cycles in Australasia: Implications for a Common Currency," Working Papers 05_04, Motu Economic and Public Policy Research.
  3. Alfred A. Haug & Christie Smith, 2007. "Local linear impulse responses for a small open economy," Working Papers 0707, University of Otago, Department of Economics, revised Apr 2007.
  4. Philip Liu, 2006. "A Small New Keynesian Model of the New Zealand economy," Reserve Bank of New Zealand Discussion Paper Series DP2006/03, Reserve Bank of New Zealand.
  5. Ftiti, Zied, 2010. "The macroeconomic performance of the inflation targeting policy: An approach based on the evolutionary co-spectral analysis (extension for the case of a multivariate process)," Economic Modelling, Elsevier, vol. 27(1), pages 468-476, January.
  6. 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.

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