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Changes in the inflation process in New Zealand

  • Bernard Hodgetts

    (Reserve Bank of New Zealand)

Registered author(s):

    This article is a revised version of a paper prepared for the Bank of International Settlements Central Bank Economists' meeting held in Basel in October 2005. The article describes changes in the inflation process in New Zealand over the past two decades. Over time, inflation seems to have become less responsive to its fundamental determinants, such as excess demand pressures in the economy or variations in the exchange rate than was previously the case. This is partly attributed to the reduction and `anchoring' of inflation expectations that followed the adoption of an inflation targeting framework. Some of the determinants of inflation have also changed in profound ways. Low global inflation and downward pressure on prices from countries such as China has muted New Zealand's inflation rate in recent years. The article notes that wages no longer appear to be a direct driver of inflation in the manner seen in the 1970s and 1980s. Changes in the competitive environment in New Zealand - especially in areas such as retailing - are also considered to have dampened the economy's `inflation response', although there has so far been relatively little empirical work in New Zealand on this topic.

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    File URL: http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2006/2006mar69_1hodgetts.pdf
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    Article provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.

    Volume (Year): 69 (2006)
    Issue (Month): (March)
    Pages: 30p.

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    Handle: RePEc:nzb:nzbbul:march2006:3
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    1. P. Cavelaars, 2002. "Does Competition Enhancement Have Permanent Inflation Effects?," MEB Series (discontinued) 2002-5, Netherlands Central Bank, Monetary and Economic Policy Department.
    2. John C. B. Cooper, 2004. "Dollarisation in Theory and Practice," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 5(4), pages 79-89, October.
    3. Phil Briggs, 2004. "Currency hedging by exporters and importers," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 67, December.
    4. Stephen G. Cecchetti & Guy Debelle, 2006. "Has the inflation process changed?," Economic Policy, CEPR;CES;MSH, vol. 21(46), pages 311-352, 04.
    5. Campa, José Manuel & Goldberg, Linda S., 2004. "Exchange Rate Pass-Through into Import Prices," CEPR Discussion Papers 4391, C.E.P.R. Discussion Papers.
    6. Charles Bean, 2005. "Monetary Policy in an Uncertain World," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 6(1), pages 31-53, January.
    7. Olivier Basdevant, 2003. "Learning process and rational expectations: an analysis using a small macroeconomic model for New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/05, Reserve Bank of New Zealand.
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