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Modelling New Zealand inflation in a Phillips curve

Author

Listed:
  • David Hargreaves
  • Hannah Kite
  • Bernard Hodgetts

    (Reserve Bank of New Zealand)

Abstract

This article presents some simple estimates of Phillips curves for New Zealand inflation and outlines a recent reorganisation of the inflation process in the Reserve Bank's Forecasting and Policy System (FPS). While modern economic theory suggests the traditional Phillips curve should be used only with care, empirical estimates for New Zealand suggest it continues to have some value. We find that estimates of the impact of resource pressure (the "output gap") on inflation are easiest to obtain from an equation on the non-tradables component of CPI inflation, and show that this relationship can be improved statistically by introducing a (fairly smooth) measure of inflation expectations on the right hand side. We present some evidence that the relationship between resource pressures and non-tradables inflation is stronger in New Zealand than some comparable countries, and further evidence that this could be related to the cyclicality of housing construction costs in New Zealand. In the latest version of the Reserve Bank's macro-model, FPS, the inflation process has been written with a tradables/non-tradables split and an explicit empirical measure of inflation expectations. This does not greatly change model properties but allows the model's congruence with the data to be assessed more directly.

Suggested Citation

  • David Hargreaves & Hannah Kite & Bernard Hodgetts, 2006. "Modelling New Zealand inflation in a Phillips curve," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, September.
    • Handle: RePEc:nzb:nzbbul:september2006:3
    as

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    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2006/2006sep69-3hargreaveskitehodgetts.pdf
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    References listed on IDEAS

    as
    1. Bernard Hodgetts, 2006. "Changes in the inflation process in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 1-30., March.
    2. James Twaddle & Florin Citu, 2003. "The output gap and its role in monetary policy decision-making," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 66, March.
    3. David Laidler, 2001. "Phillips in Retrospect," University of Western Ontario, Departmental Research Report Series 20013, University of Western Ontario, Department of Economics.
    4. Paul Conway & Ben Hunt, 1997. "Estimating potential output: a semi-structural approach," Reserve Bank of New Zealand Discussion Paper Series G97/9, Reserve Bank of New Zealand.
    5. Tim Hampton, 2001. "How much do import price shocks matter for consumer prices?," Reserve Bank of New Zealand Discussion Paper Series DP2001/06, Reserve Bank of New Zealand.
    6. Michael Graff, 2004. "Estimates of the output gap in real time: how well have we been doing?," Reserve Bank of New Zealand Discussion Paper Series DP 2004/04, Reserve Bank of New Zealand.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Bernd Hayo & Florian Neumeier, 2022. "Households’ inflation perceptions and expectations: survey evidence from New Zealand," International Economics and Economic Policy, Springer, vol. 19(1), pages 185-217, February.
    2. Sharon McCaw, 2007. "Stylised facts about New Zealand business cycles," Reserve Bank of New Zealand Discussion Paper Series DP2007/04, Reserve Bank of New Zealand.
    3. Timothy Kam & Kirdan Lees & Philip Liu, 2009. "Uncovering the Hit List for Small Inflation Targeters: A Bayesian Structural Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 583-618, June.
    4. Phil Briggs, 2007. "Lessons learned from the Economics Department's research work on household balance sheets and related issues," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 70, December.
    5. Jacek Krawczyk & Rishab Sethi, 2007. "Satisficing Solutions for New Zealand Monetary Policy," Reserve Bank of New Zealand Discussion Paper Series DP2007/03, Reserve Bank of New Zealand.
    6. Adolfo Sachsida & Marcio Ribeiro & Claudio Hamilton dos Santos, 2009. "A Curva de Phillips e a Experiência Brasileira," Discussion Papers 1429, Instituto de Pesquisa Econômica Aplicada - IPEA.
    7. Cobb, Marcus P A, 2018. "Improving Underlying Scenarios for Aggregate Forecasts: A Multi-level Combination Approach," MPRA Paper 88593, University Library of Munich, Germany.
    8. repec:fgv:epgrbe:v:67:n:4:a:8 is not listed on IDEAS
    9. Michelle Lewis & C. John McDermott, 2016. "New Zealand's experience with changing its inflation target and the impact on inflation expectations," New Zealand Economic Papers, Taylor & Francis Journals, vol. 50(3), pages 343-361, September.
    10. Tallman, Ellis W. & Zaman, Saeed, 2017. "Forecasting inflation: Phillips curve effects on services price measures," International Journal of Forecasting, Elsevier, vol. 33(2), pages 442-457.
    11. Chris McDonald, 2017. "Does past inflation predict the future?," Reserve Bank of New Zealand Analytical Notes series AN2017/04, Reserve Bank of New Zealand.
    12. 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.
    13. Mário Jorge Mendonça & Adolfo Sachsida, 2012. "Inflação Versus Desemprego: Novas Evidências Para o Brasil," Discussion Papers 1763, Instituto de Pesquisa Econômica Aplicada - IPEA.
    14. Sachsida, Adolfo, 2013. "Inflação, Desemprego e Choques Cambiais: Uma Revisão da Literatura sobre a Curva de Phillips no Brasil," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 67(4), November.
    15. Aleksejs Melihovs & Anna Zasova, 2007. "Estimation of the Phillips Curve for Latvia," Working Papers 2007/03, Latvijas Banka.
    16. Michael Ryan & Kam Leong Szeto, 2009. "An Introduction to the New Zealand Treasury Model," Treasury Working Paper Series 09/02, New Zealand Treasury.
    17. Aaron Drew, 2007. "New Zealand's productivity performance and prospects," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 70, March.

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