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A Comparison of the NZTM and FPS Models of the New Zealand Economy

Author

Listed:
  • Kam Leong Szeto
  • Paul Gardiner
  • Richard Gray
  • David Hargreaves

    (The Treasury)

Abstract

This paper investigates and compares the dynamic properties of the New Zealand Treasury model (NZTM) and the current version of the Reserve Bank’s Forecasting and Policy System model (FPS). The main use of both two models is to produce macroeconomic forecasts. The NZTM model produces forecasts that are used as an input into the final forecast numbers presented in the Economic and Fiscal Updates. The FPS model is used to produce the published forecasts in the Reserve Bank’s quarterly Monetary Policy Statement. Both models contain a number of judgements around the structure of the economy, the key shocks that impact on the economy, and how the economy evolves in response to these shocks. The paper concludes that one of the main differences between the two models occurs in the impact of a world price shock on the real exchange rate and subsequently on exports and imports. Another key difference is the mechanism through which the net foreign asset position returns towards equilibrium. In FPS, the external balance is partly attained by forward-looking consumers who adjust spending to reach desired wealth positions. In contrast, the real exchange rate is the key mechanism in NZTM for re-establishing equilibrium.

Suggested Citation

  • 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.
    • Handle: RePEc:nzt:nztwps:03/25
    as

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    File URL: https://treasury.govt.nz/sites/default/files/2007-09/twp03-25.pdf
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    References listed on IDEAS

    as
    1. Aaron Drew & Benjamin Hunt, 2000. "A comparison of the properties of NZM and FPS," Reserve Bank of New Zealand Discussion Paper Series DP2000/02, Reserve Bank of New Zealand.
    2. Sebastian Edwards, 1987. "Tariffs, Terms of Trade, and the Real Exchange Rate in an Intertemporal Optimizing Model of the Current Account," NBER Working Papers 2175, National Bureau of Economic Research, Inc.
    3. W. E. G. Salter, 1959. "Internal And External Balance: The Role Op Price And Expenditure Effects," The Economic Record, The Economic Society of Australia, vol. 35(71), pages 226-238, August.
    4. Dornbusch, Rudiger, 1974. "Tariffs and nontraded goods," Journal of International Economics, Elsevier, vol. 4(2), pages 177-185, May.
    5. Olivier Basdevant & David Hargreaves, 2003. "Modelling structural change: the case of New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/03, Reserve Bank of New Zealand.
    6. 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.
    7. Edwards, Sebastian & van Wijnbergen, Sweder, 1987. "Tariffs, The Real Exchange Rate and the Terms of Trade: On Two Popular Propositions in International Economics," Oxford Economic Papers, Oxford University Press, vol. 39(3), pages 458-464, September.
    8. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Teresa Leal & Javier J. Pérez & Mika Tujula & Jean-Pierre Vidal, 2008. "Fiscal Forecasting: Lessons from the Literature and Challenges," Fiscal Studies, Institute for Fiscal Studies, vol. 29(3), pages 347-386, September.
    2. Jamie Murray, 2013. "Parameter Uncertainty and the Fiscal Multiplier," Treasury Working Paper Series 13/19, New Zealand Treasury.
    3. 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.
    4. Viv Hall & Angela Huang, 2004. "Would adopting the us dollar have led to improved inflation, output and trade balances, for New Zealand in the 1990s?," New Zealand Economic Papers, Taylor & Francis Journals, vol. 38(1), pages 49-63.
    5. Emma Xiaoqin Fan & Jesus Felipe, 2005. "The diverging patterns of profitability, investment and growth of China and India, 1980-2003," CAMA Working Papers 2005-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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    More about this item

    Keywords

    New Zealand; NZTM; FPS; Macroeconomic forecasts; Net foreign asset position; forwarding-looking consumers; Real exchange rate;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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