How vulnerable is New Zealand to economic shocks in its major trading partners?

This paper estimates a Structural Vector Autoregressive (SVAR) model to investigate the impacts of global shocks on four key New Zealand macroeconomic variables: gross domestic product (GDP), interest rates, the consumer price index (CPI), and the exchange rate, and also reports the forecast error variance decomposition. The model is used to assess New Zealand’s vulnerability to cyclical shocks in its major trading partners: China, the United States, and Australia. Results show that New Zealand’s GDP responds positively to positive GDP shocks from China and the world block, with effects that feed through the economy having an impact on price levels, interest rates and exchange rates. New Zealand’s CPI responds differently to shocks depending on the country of origin, and interest rates respond strongly to most foreign interest rate and foreign GDP shocks with persistent effects. The impact of most foreign shocks on New Zealand’s exchange rate cannot be accurately determined in the model developed in this paper. The analysis shows some of the risks New Zealand faces if it concentrates its trade too heavily on a small number of key economies, and provides a useful lens for thinking about the macroeconomic relationships between New Zealand and the rest of the world.