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New Zealand's risk premium

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  • Craig Burnside

Abstract

Interest rates in New Zealand are generally higher than in other industrialized economies. Do these higher interest rates imply lower investment and slow growth? I find that high interest rates in New Zealand, through much of the inflation targeting period, appear to have represented compensation for the risk of rare and extreme events, during which the New Zealand dollar was expected to depreciate. Similar factors appear to explain Australia's risk premium, yet Australia has had a higher level of investment and stronger growth. Therefore, I attribute the differing economic performance of the two countries to other structural differences.

Suggested Citation

  • Craig Burnside, 2013. "New Zealand's risk premium," New Zealand Economic Papers, Taylor & Francis Journals, vol. 47(1), pages 27-52, April.
    • Handle: RePEc:taf:nzecpp:vv:47:y:2013:i:1:p:27-52
    DOI: 10.1080/00779954.2012.721690
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    References listed on IDEAS

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    1. Frankel, Jeffrey A & Chinn, Menzie D, 1993. "Exchange Rate Expectations and the Risk Premium: Tests for a Cross Section of 17 Currencies," Review of International Economics, Wiley Blackwell, vol. 1(2), pages 136-144, June.
    2. Craig Burnside & Martin Eichenbaum & Isaac Kleshchelski & Sergio Rebelo, 2011. "Do Peso Problems Explain the Returns to the Carry Trade?," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 853-891.
    3. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
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    5. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2011. "Carry Trade and Momentum in Currency Markets," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 511-535, December.
    6. Craig Burnside & Bing Han & David Hirshleifer & Tracy Yue Wang, 2011. "Investor Overconfidence and the Forward Premium Puzzle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(2), pages 523-558.
    7. Shin, Hyun Song & Plantin, Guillaume, 2011. "Carry Trades, Monetary Policy and Speculative Dynamics," CEPR Discussion Papers 8224, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Robert A Buckle & Amy A Cruickshank, 2013. "The Requirements for Long-Run Fiscal Sustainability," Treasury Working Paper Series 13/20, New Zealand Treasury.
    2. John Creedy & Grant Scobie, 2017. "Debt projections and fiscal sustainability with feedback effects," New Zealand Economic Papers, Taylor & Francis Journals, vol. 51(3), pages 237-261, September.
    3. Anne-Marie Brook, 2014. "Options to Narrow New Zealand’s Saving – Investment Imbalance," Treasury Working Paper Series 14/17, New Zealand Treasury.
    4. John Creedy & Grant Scobie, 2017. "Debt projections and fiscal sustainability with feedback effects," New Zealand Economic Papers, Taylor & Francis Journals, vol. 51(3), pages 237-261, September.

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