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VARIABLE GSTl A TOOL FOR MONETARY POLICY IN NEW ZEALAND?

Author

Listed:
  • Iris Claus
  • Brandon Sloan

Abstract

To help maintain price stability in New Zealand a countercyclical use of the goods and services tax (GST) has been proposed. This paper argues that a variable GST rate is unlikely to be a useful stabilisation tool for monetary policy. It first discusses some of the problems that would arise with the implementation of a variable GST rate. It then develops a stylised model of the New Zealand economy to assess the effects of using a variable GST rate as a monetary policy tool relative to the conventional instrument, an interest rate. The results show that a variable GST rate would be less effective in dampening business cycles than an interest rate. It would lead to larger adjustments in the policy instrument and fluctuations in the real economy and inflation. Moreover, a variable GST rate would produce greater welfare losses from monetary policy than an interest rate tool.

Suggested Citation

  • Iris Claus & Brandon Sloan, 2008. "VARIABLE GSTl A TOOL FOR MONETARY POLICY IN NEW ZEALAND?," CAMA Working Papers 2008-30, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2008-30
    as

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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2017-02/30_claus_sloan_2008.pdf
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    References listed on IDEAS

    as
    1. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
    2. McCallum, Bennett T & Nelson, Edward, 2000. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 74-91, Winter.
    3. Julia Hall & Grant Scobie, 2005. "Capital Shallowness: A Problem for New Zealand?," Treasury Working Paper Series 05/05, New Zealand Treasury.
    4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    5. Bob Buckle & Aaron Drew, 2006. "Testing stabilisation policy limits in a small open economy: editor's summary of a macroeconomic policy forum," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 1-9, December.
    6. Angela Huang & Dimitri Margaritis & David Mayes, 2001. "Monetary Policy Rules in Practice: Evidence from New Zealand," Multinational Finance Journal, Multinational Finance Journal, vol. 5(3), pages 175-200, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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